The partial retreat - during which heavy fighting again flared up in Bihac - followed a stunning Croatian Army assault against Bosnian Serb towns south of Bihac which cut the main supply route to the Krajina Serb "capital", Knin.
"We have some indications that a few [Krajina Serb] troops might be moving out," said Major Ole Reith, a UN official in Bihac, but he cautioned that the withdrawal had barely begun. "We have no confirmation of heavy weapons, tanks, artillery and mortars going out. A few buses of soldiers leaving is not significant yet."
Yasushi Akashi, the UN envoy, held talks in Knin yesterday with Milan Martic, the Krajina Serb leader who reportedly is keen to sue for peace and who agreed to negotiations with the government in Zagreb.
Fighting broke out yesterday afternoon in the Bihac pocket, where the government's Fifth Corps is fending off a three-pronged attack by 20,000 Bos-nian and Krajina Serb soldiers supporting about 2,500 troops loyal to the maverick Muslim businessman Fikret Abdic.
"At 1600 hours some activities started, with heavy shelling, small-arms fire, and it's on-going right now," Major Reith said by telephone last night from the UN camp at Coralici, near the front line. "We can't say exactly what's going on, but it is some activity with infantry on the ground, given that there is some small-arms fire."
The Croatian assault in Bosnia and the subsequent lull had allowed the Fifth Corps to strengthen its defences and regroup its forces, Major Reith said. "I'm sure it's done some good, both for morale and in military terms," he added. As for the 160,000 civilians in Bihac, "they are relieved but they're not sure it will help in the long term", the major said. "I think they expect something more. They are very cautious. They're not cheering yet."
Mr Martic told Mr Akashi he would withdraw all troops from Bihac, refrain from any cross-border attacks, allow the UN access to the area and send his military commander, General Milan Mrksic, for talks with his Croatian counterpart, General Zvonimir Cervenko.
But Zagreb is bullish and demanding results rather than words. President Franjo Tudjman rejected Mr Akashi's proposals last night, according to Croatian television, saying they "do not constitute any basis for peaceful reintegration and do not represent a response to any condition which I set out in my talks with you on Saturday".
In any event, no deadline was given for the terms to take effect, and the atmosphere in Knin is one of "wait and see", said the UN commander there, Colonel Andrew Leslie.
However, the Croatian advance along the Bosnian side of the border, which risks severing Knin from its allies in Bosnia and Serbia proper, is a horrifying development for Mr Martic, particularly since Belgrade shows no sign of coming to his rescue.
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