Narrow Strip of Land Gives Wider View of Balkan War : Europe: Small slice of Serb-held Croatia could be next battlefield--or bargaining chip. Tension, fear are rising.

When the course of war in the Balkans--be it a path to peace or a precipice to disaster--unfolds over the coming weeks, there will be no better vantage point than the Hotel Slavonia.

The vista from the crumbling brick hotel here displays a panorama of terra-cotta roofs and leafy treetops. Less than three miles away, a steeple nicks the horizon, a Serbian Orthodox church in the neighboring village of Mirkovci.

The not-so-distant village is in Croatia, at least according to the map, but it has not been Croatian for three years. Mirkovci lies at the front line of the only Serb-controlled stronghold left in Croatia, a sliver of farmland known as Eastern Slavonia conquered by separatist Serbs in 1992.

In terms of geography, the fertile territory skirting the Danube River is paltry. It accounts for only a tiny fraction of Croatia and just 150,000 people. But its 850 square miles--about twice the area of Los Angeles--have become the most significant piece of earth in the former Yugoslav federation.

If the war gets worse, it will happen in Eastern Slavonia, unfurling along 90 miles of a front line separating enemy towns such as Vinkovci and Mirkovci as well as the two biggest armies in the Balkan conflict--the armies of Croatia and the rump Yugoslavia.

If the hostilities ease, Eastern Slavonia will be at the heart of any brokered deal, the pot of gold for the side willing to swallow its pride somewhere else.

“Eastern Slavonia is the last issue of this war to be resolved,” said Milos Vasic, a well-respected Belgrade analyst with the independent magazine Vreme. “If the Croats are reckless enough and don’t resist the temptation, [Serbia] will have every reason to fight back.”

On and off for a week, shells have hailed back and forth in a menacing test of wills. One volley from separatist Serbs in Mirkovci shattered windows at the Hotel Slavonia and propelled a parked car 30 feet into the air. Others have sent terrified people fleeing from their homes on each side of a barbed-wire divide.

With the crushing Croatian army victory last week over Serbs in the breakaway Krajina region in the west, nervous eyes have turned toward Eastern Slavonia. Here in Vinkovci, soldiers filled hundreds of sandbags over the weekend and piled them in front of downtown businesses. The hospital has moved non-emergency operations to the basement of a department store, and the Hotel Slavonia has opened its nuclear shelter to frightened residents with no cellars.

“The tensions have never been so high,” said Kirsten Haupt, a U.N. official across the line of demarcation in Serb-controlled territory, where U.N. personnel have been restricted to their camp and journalists have been denied entry. “Mentally, people are prepared for anything to happen.”

Croats here want Eastern Slavonia back more than ever, the last piece in a reassembled Croatian puzzle. Serbia--just across the Danube--will not let it go, digging in its heels over the final fragment of bloodied lands won in 1991 and 1992.

Both sides have been shuffling troops and military hardware in showy demonstrations of strength. Tough talk of war is everywhere. Even 15-year-old Matko Matkic, hiding from the shelling with his mother in an underground shopping center in Vinkovci, spoke without hesitation when asked about Eastern Slavonia.

“Yes, we should fight,” he said. “If we don’t, it would just eat at us from the inside.”

But a battle over Eastern Slavonia, military analysts say, would probably be the most calamitous in four years of war, heightening the danger of an explosion of the entire Balkan powder keg.

The fighting would pit a newly confident and heavily armed Croatian army against the powerful forces of Yugoslavia, under pressure to avenge the Croatian conquests of late. It would be the first direct faceoff between the two since Croatia assembled a formidable army of its own after breaking from the former Yugoslav federation.

“For Eastern Slavonia, this country will fight,” said Predraj Simik, an analyst with a think tank in Belgrade, the Serbian capital. “It would represent a direct security threat [for Serbia].”

Serbian President Slobodan Milosevic has been able to portray, in the media he controls, the fall of the Krajina as a result of the greed and stupidity of the Krajina Serb leadership. But Eastern Slavonia is different. Milosevic has left the public impression that the region rests under his protective wing and that it is where he draws the line.

In Croatia, officials have issued a string of bellicose statements, indicating a willingness to take up arms to reclaim the territory.

“Croatia will not give it up,” said Croatian Defense Minister Gojko Susak. “Our estimate is that Croatia can liberate it by force if not by negotiation.”

Analysts in both Croatia and Serbia said that Croatian President Franjo Tudjman, confident after his easy victory in the Krajina, will be tempted to go after Eastern Slavonia--but probably will not.

At least not yet.

“It is bravado and precaution,” one Western diplomat said of the military rumblings in both countries. “I think both actions are defensive.”

The temptation remains strong, however. The Krajina rout handed Tudjman a number of victories: He got back nearly a third of his country, he did so on his terms--militarily--and he generally escaped world condemnation.

“He hit the jackpot,” Simik said.

Some analysts suggest that rather than focus on Eastern Slavonia, Tudjman--ostensibly aligned with the Bosnian Muslims--may concentrate on chipping away at Bosnian Serb territory and building a better buffer between Croat- and Serb-controlled territory, especially in the coastal area south of Knin.

There has also been talk of a behind-the-scenes deal between Tudjman and Milosevic, one that carves up much of Bosnia-Herzegovina between the two countries and allows Croatia to keep the Krajina in exchange for staying away from Eastern Slavonia.

For residents of towns like this one, where windows are routinely shattered and the main street is pocked with fresh shell imprints, such talk borders on blasphemy. Many refugees have settled here, and they want to go home. And they don’t mind a fight.

“I had to run from grenades from my village with my children, and we just barely escaped,” said refugee Gordana Tadic, a nurse at a first-aid center set up in the fitness center at the Hotel Slavonia. “My husband and I built our house, and they took it from us. There is a Serb living in it now.

“We would choose more war if it is the only way to get it back,” she said. “The war won’t be over until I can go back home.”

Times staff writer Tracy Wilkinson in Belgrade contributed to this report.