July 22 (Bloomberg) -- Serbia's dinar rose the most in a month against the euro after wartime leader Radovan Karadzic was arrested following 13 years on the run, removing an obstacle to the Balkan nation's bid for membership of the European Union.

The dinar also jumped versus the dollar after the country's Security Council said Karadzic was detained yesterday by Serbian security forces and handed over to the Special War Crimes Court in Belgrade. He is facing charges of genocide over the murder of almost 8,000 Muslims in Srebrenica during the 1992-95 Bosnia- Herzegovina war. Karadzic's capture was a condition for closer relations with the EU, which Serbia hopes to join.

``This is positive news for the dinar as it brings Serbia one step closer to EU accession,'' said Goran Saravanja, a Balkan region analyst for UniCredit SpA in Zagreb, Croatia. ``It shows they are open to working with the international community and that there is the political will to comply with The Hague.''

The dinar advanced as much as 0.9 percent per euro, the most since June 20, and was at 78.2950 as of 10:09 a.m. in Belgrade, from 78.7900 yesterday. Against the dollar, it climbed 1.2 percent to 49.0551, from 49.6253.

The currency has gained 1.2 percent against the euro since July 7, when the new pro-European coalition government was endorsed after two months of negotiations. The administration, led by Prime Minister Mirko Cvetkovic, has vowed to prepare Serbia for membership of the 27-member EU and open its economy to further international investment. The EU signed the Stabilization and Association Agreement with Serbia in April.

`Important Signals'

The International Criminal Tribunal for the Former Yugoslavia in The Hague has accused Karadzic of atrocities committed during the three-year war, which killed an estimated 250,000 people and forced another 1.8 million from their homes. Karadzic was arrested on a bus in Belgrade, his lawyer Svetozar Vujacic said.

``This sends important signals about the new government and which way it is going,'' said Agata Urbanska, an emerging-markets currency strategist in London at ING Bank NV. ``They'll have to undertake a whole lot of reforms necessary for EU membership, which is very positive.''

The court in Belgrade must present criminal charges against Karadzic before he can be extradited to the United Nations Tribunal in the Netherlands. Implementation of the Stabilization and Association Agreement is conditional on the arrest of war crimes suspects.

The arrest raises the possibility that Ratko Mladic, the Bosnian Serb military commander, will also be apprehended, Saravanja said. ``This is extremely positive not just for Serbia but for the entire region.''

Serbia's benchmark interest rate, at 15.75 percent, is the highest in Europe after Turkey. It has been raised five times since December and makes the dinar an attractive target for the carry trade, where funds borrowed in countries with lower rates of interest are invested in countries where returns are higher.

The dinar has advanced 4.2 percent against the euro and 20 percent versus the dollar during the past 12 months.

To contact the reporter on this story: Emma O'Brien in Moscow at eobrien6@bloomberg.net

Last Updated: July 22, 2008 04:31 EDT