Ambassadors from the alliance will meet today to start putting together a package of military measures. The deployment of ground troops will also be under consideration, but officials think it more likely that the threat of air strikes will be preferred.
One possibility is a later deployment of Nato forces on the ground to police a peace deal. Britain has taken the lead in pressing for tougher action, backed by France, but a decision will hinge on US military commitment.
American congressmen have expressed reluctance to see a further US deployment of ground forces in the Balkans, but may be more open to the idea of air strikes.
Until now, the focus had been on a troop deployment on Kosovo's borders to seal off the region. But with the border already sealed from the other side by Serbian forces, this appears to have little purpose. It would also be expensive and time-consuming, with no clear objective.
Many countries are already finding it hard to sustain a military presence in Bosnia, and a further ground deployment would cause more problems. Germany and America have both expressed reservations about the idea.
Instead, the idea circulating in Brussels and national capitals is to threaten air strikes if the Serbian crackdown does not stop. In Bosnia, the West reacted very slowly, gradually ratcheting up the military measures, with little impact on the conflict.
Officials stress that any deployment of forces, whether in the air or on the ground, cannot be open-ended, must have well-defined political objectives, and must support a peaceful conclusion. It must include some means of persuading the Kosovo Liberation Army to disarm and negotiate, or it would merely accelerate the fighting, officials warned.
A UN resolution authorising force is under discussion in New York. Diplomats hope that Russia can be brought along with the plan, by involving Moscow directly in efforts to talk Mr Milosevic into scaling down his operations in Kosovo. Though force could be used without a UN resolution, this would cause big problems with Russia.
Political directors of Contact Group countries (the US, Russia, Britain, France, Germany and Italy) meet in Paris today to set the agenda for a meeting in London on Friday of foreign ministers.
Ambassadors were meeting informally yesterday in Brussels to consider options, and will today try to put together a package to present to Nato defence ministers when they meet in Brussels on Thursday. The aim is to authorise Nato planners to put together a military and political strategy, which would take some time. But the early and visible threat of air strikes, if credible, might help to head off further bloodshed, diplomats hope.
The package is likely to include an increase in Nato visibility in the Balkans, including more exercises and training missions, as an indication that the alliance is ready to intervene and to soothe security fears in neighbouring countries such as Romania and Macedonia.