July 22 (Bloomberg) -- Serbia took a big step toward joining the European Union by arresting Radovan Karadzic, the former Bosnian Serb leader wanted for complicity in war crimes including the massacre of 8,000 Muslims at Srebrenica in 1995.

The arrest of one of the most-sought fugitives from the Yugoslav civil wars after 13 years on the run came two weeks after a pro-Western government took power in Belgrade with the goal of ending Serbia's isolation.

``Everyone is jumping for joy -- finally, finally,'' French Foreign Minister Bernard Kouchner told reporters in Brussels today. ``It's certainly a good thing for bringing Serbia closer to the European Union.''

While the EU pressed Serbia to hunt down two other suspects, the arrest shows President Boris Tadic's determination to bury the legacy of Serb nationalism and forge closer ties between the nation of 7.5 million and the European market. Serbia is the slowest in the Balkans to embrace the EU. Slovenia, the first republic to break away from Yugoslavia in 1991, became the first to join the bloc, in 2004.

Croatia seeks to join by 2011 and the Republic of Macedonia, Bosnia-Herzegovina and Montenegro are also making strides.

After years of seesawing power-sharing deals between pro-EU and nationalist parties, the arrest reflected the growing leverage of Tadic, whose Democratic Party on July 7 joined a coalition with the Socialist Party of Serbia and parties of national minorities under Mirko Cvetkovic, the new prime minister.

`Major Victory'

``This is a major victory for Tadic and this government,'' said Milan Kovacevic, a Belgrade-based independent economist. ``This will have a major impact on the economy. The Serbian economy is exhausted and this is a chance for its overhaul.''

Expectations that Serbia will move faster toward the EU pushed up the dinar the most in a month against the euro. The currency advanced as much as 1.3 percent and was at 77.8956 per euro as of 4:30 p.m.

Tadic's newfound strength is likely to feed over to economic policy, boosting investor confidence, Edward Parker, head of emerging European sovereigns at Fitch Ratings, said in an e-mailed reply to questions. For now, Fitch is leaving its credit rating for Serbia at BB-.

Serb authorities and Karadzic's lawyer offered conflicting accounts of the arrest, which was made public late yesterday. The government said the bearded 63-year-old Karadzic, now practicing alternative medicine under an assumed name at a private clinic, was detained yesterday evening on the outskirts of Belgrade. The suspect's lawyer, Svetozar Vujacic, said on B92 television that the arrest took place on July 18.

EU Impact

In Brussels, EU foreign ministers hailed the ``important step'' on Serbia's obstacle-strewn road to membership. Still, they declined to immediately start implementing a pre-entry pact with Serbia, because two other suspects remain at large, former Bosnian Serb General Ratko Mladic, 66, and Goran Hadzic, 49, who headed a breakaway Serb faction in Croatia.

Other hurdles to Serbia's EU bid include the status of Kosovo, the mostly ethnic Albanian province that declared independence from Serbia in February with the backing of the EU's biggest powers and the U.S.

Serbia is pressing the United Nations to brand Kosovo's breakaway as illegal. While Serbia won't go to war to reclaim the province, it ``will not concede a millimeter of ground, using all political, diplomatic and legal means,'' Foreign Minister Vuk Jeremic said today in Brussels.

`Candidate' Status

Still, the EU celebrated Karadzic's arrest as a sign that Serbia, its forces driven from Kosovo by NATO in 1999, is now on an irreversible path to EU-style democracy. Serbia said its goal is to become a formal ``candidate'' for EU entry by early 2009.

Enlargement Commissioner Olli Rehn called on EU governments to reward Serbia by implementing the free-trade provisions of the pre-entry pact ``so that we can sooner consider candidate status.''

Karadzic and Mladic stand accused by the International Criminal Tribunal for the Former Yugoslavia of responsibility for atrocities during Bosnia-Herzegovina's 1992-95 war, in which an estimated 250,000 people were killed and a further 1.8 million driven from their homes.

The 27-nation EU has made ``full cooperation'' with war- crimes prosecutors its condition for putting Serbia, once the dominant republic in Yugoslavia, on a faster track to membership.

`Other Steps'

Political leaders in the Netherlands, scarred by the failure of Dutch peacekeeping troops to prevent the Srebrenica massacre, have taken the hardest line in the EU on the need for Serbia to round up war-crimes suspects. While welcoming Karadzic's arrest, Dutch Foreign Minister Maxime Verhagen told NOS public radio today that Serbia still needs to take ``other steps'' by putting the remaining fugitives behind bars.

Croatia trod a similar path toward the EU, only winning the go-ahead to start entry talks in 2005 after tipping war-crimes sleuths off as to the whereabouts of a Croatian suspect, general Ante Gotovina, accused of atrocities against ethnic Serbs.

It wasn't clear when the Serb government will hand Karadzic over to the war-crimes tribunal, based in The Hague. After word of the arrest spread, dozens of supporters of ultranationalist organizations protested in front of the Belgrade court where Karadzic is in custody.

To contact the reporters on this story: Aleksandra Nenadovic in Belgrade at anenadovic@bloomberg.net; James G. Neuger in Brussels at jneuger@bloomberg.net

Last Updated: July 22, 2008 11:07 EDT