The two sides had been close to signing a truce, international mediators said, but after several hours it appeared the process would move more slowly than anticipated. The US ambassador, Peter Galbraith, said the discussions on demarcation lines were 'complicated' and would probably continue into the evening.
The Russian envoy, Vitaly Churkin, urged agreement to avoid losing momentum. 'What we want is not progress, we want agreement,' he said.
International mediators hope the ceasefire accord will be a first step towards resolving the dispute over the breakaway region.
'The border is long, the terrain is difficult, the maps are many and the history is very unpleasant,' Mr Churkin told reporters earlier outside the Russian embassy, where the two sides met for the second time in a week.
The US special envoy, Charles Redman, joined Mr Churkin at the talks to press rebel Serbs and Croats into agreeing a lasting truce that would end a three-year conflict. Diplomats say resolving the Krajina conflict is a key element of any overall settlement in the former Yugoslavia.
Asked if he expected a ceasefire agreement, Slobodan Jarcevic, who led the Serb delegation, said: 'Yes, probably.' In the afternoon, the leader of the Croatian delegation, Hrvoje Sarinic, left briefly, presumably for consultations.
The Serbs and Croats are discussing a permanent truce, with each side withdrawing infantry 1km and heavy weaponry 20km (12 miles), diplomats involved in the talks said.
A spokesman for the mediators, John Mills, said an hour into the talks that the mood was 'optimistic' as the two sides studied maps with UN military officers. Mediators insist the proposed accord focuses only on a separation of forces.
If the truce is signed, the two sides will begin negotiating the reopening of roads and telephone lines as well as questions over Krajina's political status, mediators said.Reuse content