The 3,000-strong force, to be called the Kosovo Corps, will be allowed to carry weapons. About two-thirds of the KLA - which currently has about 9,000 soldiers - will be disbanded, with the remainder recruited into the new force. The corps will also include a helicopter unit, a security service, an honour guard and a rapid reaction unit.
Before it can be implemented, the plan must be approved by the UN Security Council, where it is likely to run into stiff opposition from Russia, which fears the corps is an army-in-waiting should Kosovo ever become independent.
Russian K-For troops shot dead three Serbs on Monday in Kosovo after a gun battle between Serbs and Albanians. That action has helped to lock the Russian troops into K-For's operations, and helped to allay the fears of ethnic Albanians who view the Russians as inherently pro-Serb because of cultural and religious ties.
But the Russian deputy Foreign minister, Aleksandr Avdeyev, said Moscow was against any proposal that could preserve the KLA as an organised structure because it would go against the demilitarisation agreement signed by Nato and the political leader of the KLA, Hashim Thaci, in June. He said: "We understand the demilitarisation in the full sense of that word. That is not only the confiscation of armaments but also the disbandment of KLA structures."
KLA officials have themselves said that the Kosovo Corps is an army-in- waiting. "We are preparing this Kosovo Corps to be a Kosovo Army, so when [the peace-keeping force] leaves, they can become the Kosovo Army, no matter what the state of Kosovo," Naim Maloku, a security adviser to Mr Thaci, told the Associated Press. He insisted, however, that the corps would co- operate with Nato.
The KLA leadership appears to be playing a double game, and speaking in two different voices. Nato officials admit they wonder whether the KLA leadership - which has repeatedly affirmed its commitment to the demilitarisation agreement - is saying one thing to alliance negotiators and another to its commanders in the field.
Ibish Mazreku, deputy commander of an elite KLA unit known as the Delta Force that operates near the Albanian border, said: "From the beginning, [the corps] will be the Kosovo Army - not a national guard because that would be accepting that we are part of Serbia."
What to do with thousands of armed young men with military training in an extremely volatile region is proving a dilemma for Western policymakers.
The KLA needs to be included in the province's future security arrangements to ensure it retains the support of the Albanian majority. But the greater the role given to the KLA, or its successor organisation, the more influence and prestige it accrues, so increasing the likelihood of an eventual independence.
There are also fears that the Kosovo Corps would be used to continue the attacks on the remaining Serbs and Roma in Kosovo, some of whom have been killed or forced from their homes by returning Albanians.
Nato's secretary general, Javier Solana, who visited Pristina on Monday, took a different view and described the corps as a civilian organisation of a humanitarian nature.
He said KLA members would be recruited both for the corps and for a separate police force. "It is essential that the KLA is transformed from an army into a civilian organisation which will play its part in building a free and democratic Kosovo," he said.
The KLA, which fought a 16-month guerrilla campaign against Serb rule, is due to disband on 19 September.
Washington has tried to allay fears that the force will be a continuation of the KLA under a different name. During his visit to the Balkans last weekend, United States Senator Joseph Biden warned that if the KLA failed to demobilise and retained any quasi-military role after 19 September, the US Congress would refuse further assistance to the province.