ANALYSIS-Legacy issues block Balkan EU, investment path

* Most Balkan states still cling to historic rivalries

* Serbia-Kosovo tensions have derailed region's detente

* Bosnia October election not seen bringing relief * Investors interested but wary

By Zoran Radosavljevic ZAGREB, March 17 (Reuters) - Western Balkan nations warred in the 1990s but they now share the goal of joining the European Union. Yet despite economic and political progress in the past decade, historical rivalry still obstructs their EU prospects.

Even talking about common goals can prove thorny, which is making them less attractive to investors who regard the region as a frontier market but want to see concrete progress towards European Union accession.

A high-level regional conference next Saturday hosted by EU member Slovenia may fall through because Serbian President Boris Tadic refuses to attend unless Kosovo, a former Serbian province that declared independence in 2008, comes as a U.N.-run protectorate, which Pristina refuses.

"There are bilateral issues in the region that can slow down (EU integration). It would be an illusion to think those issues can just be put aside," said Gerald Knaus of the European Stability Initiative think-tank. "But as countries get closer to the EU, all these tough issues will have to be resolved."

Serbs, Croats and Bosnians have a common Slavic heritage, and until 1991 lived in a common state -- Yugoslavia -- which fell apart in wars in the 1990s. Serbs and ethnic Albanians were on opposing sides of the Kosovo conflict in 1998-99.

The nationalism that fuelled those conflicts has eased, but legacy problems abound. Slovenia's frantic shuttle diplomacy between Belgrade and Pristina has not yet yielded a compromise on the March 20 conference of regional leaders.

Croatia is seen joining the EU probably in 2012, but membership remains more elusive for Albania, Bosnia, Kosovo, Macedonia, Montenegro and Serbia.

Analysts rule out a return to widespread war, although some say a worst-case scenario in Bosnia might lead to renewed ethnic armed conflict there. Investors remain wary of the intractable politics of a region once dubbed "the black hole of Europe."

"There is potential, for sure, for economic development. There is room for catch-up. But political risk is the biggest issue, historical legacy is still weighing on the region," said Stuart Culverhouse of Exotix investment banking group in London.

KOSOVO INDEPENDENCE REVIVES TENSIONS

After reformers came to power in Croatia and Serbia in 2000, intra-regional political and business ties were restored but the 2008 independence of Kosovo once again derailed rapprochement.

"It was a trigger that activated a series of unwanted consequences, aggravated relations, made Serbia isolated from all the neighbours," said Damir Grubisa, head of the Centre for European Studies at Zagreb University.

Serbian officials have refused to attend events attended by counterparts from Kosovo. Foreign Minister Vuk Jeremic said only this month that if pressed to choose between the EU and Kosovo, Serbia would chose the latter.

"The Kosovo issue will ... slow the progress of the region, and particularly Serbia, towards the EU. And then there is the problem of Bosnia and the precarious balance of its three ethnic groups," Grubisa said.

Bosnia's two rival and highly autonomous regions -- the Serb Republic and the Muslim-Croat Federation -- have been unable to pass key laws, effectively paralysing the weak central state. The EU's stick-and-carrot approach has yielded no result either.

A high-level attempt by the EU and the United States last October to break the deadlock by dangling a leap forward in Bosnia's EU and NATO membership aspirations failed.

Tensions are likely to mount ahead of a presidential and general election in October. Nationalist parties will probably triumph again in both regions, which will further encourage the Serb Republic's defiance of Sarajevo institutions.

INVESTORS LOOKING ELSEWHERE

Relations between Belgrade, which tacitly supports its ethnic kin in Bosnia, and Sarajevo have cooled in the past year. Belgrade also went through a rough patch in relations with its Balkan neighbours after they recognized Kosovo.

"Events in Serbia will be the key for the region, whether President Tadic is able to shrug off the pressure from nationalists and pursue serious pro-EU policies," said Zeljko Trkanjec, world news editor of Croatia's Jutarnji List daily.

In a bid to encourage the region, Brussels in December lifted visa requirements for Serbia, Macedonia and Montenegro and activated a trade agreement with Belgrade, but there has been little progress since then.

"Brussels cannot do more than the countries themselves, and they are not doing a lot. There is no huge enthusiasm, no big love for the EU, no pressure for membership from the region," said Vladimir Gligorov of the Vienna Institute for International Economic Studies.

Investors want to see faster reforms and better business climate. "Even Turkey has a better image for investors now," he said.

Culverhouse from Exotix said the region's markets were small and illiquid, with few investment instruments, but the sovereign bonds were already trading at very tight spreads. Coupled with palpable political risks, these factors deter global investors.

"In an environment of higher volatility and uncertainties about global recovery, many people will maybe think that those risks are too much at the moment, when they could get similar returns elsewhere," he said.

For related graphics click on http://graphics.thomsonreuters.com/310/EZ_BLKMP0310.gif)) (Additional reporting Ivana Sekularac in Belgrade, Daria Sito-Sucic in Sarajevo; Editing by Adam Tanner and Paul Taylor)