The artillery exchange heightened fears the Croatian army would strike at the heart of the Serb-held lands south of Zagreb within 48 hours.
About 100,000 Croatian troops, most of them regulars, have been at full readiness for almost a week. Reservists have been mobilised in areas close to UN Sectors North and South, the main areas of land held by the secessionist Krajina Serbs, ready to reinforce troops in the event of an offensive.
"While clearly surprise is no longer a significant issue, the longer [the Croats] sit without a decision, the better prepared the Krajina Serb defensive plans should be," one UN officer said. There is also the risk of a Bosnian Serb counter-attack to retake the towns of Glamoc and Bosansko Grahovo in western Bosnia, which fell last week to the Croatians, severing a vital supply route to Krajina Serb headquarters in Knin. In Belgrade and Geneva diplomatic efforts were under way to deflect the protagonists. The US ambassador to Zagreb, Peter Galbraith, won concessions which may prevent the outbreak of full-scale war between Croatia and its rebel Serbs.
Milan Babic, the leader of the Krajina Serbs, said he agreed to make concessions after a tense two-hour meeting with Mr Galbraith in Belgrade on Wednesday night. These included a guarantee to withdraw all Krajina Serb troops from the Bihac pocket, where they had been fighting Bosnian Muslim forces. It is understood that the US will now try to persuade President Franjo Tudjman of Croatia to call off his planned attack on the Serbs. Britain was last night urging Mr Tudjman to respond to the Krajina Serb offer and Chancellor Helmut Kohl of Germany was also seeking to contact the Croatian President.
Mr Galbraith said the Serbs agreed to negotiate on the "reintegration" of their breakaway region with Croatia - a dramatic change of attitude on the part of the hardline Krajina Serbs. The move followed a day in which senior government figures in Belgrade made it clear that Serbia was resolved not to be dragged into war on behalf of the Krajina Serbs.
The US envoy flew to Belgrade on Wednesday to warn Mr Babic his forces faced "obliteration" at the hands of 100,000 Croatian troops massed to reclaim the Krajina border country. He told Mr Babic the US could act only if the Serbs issued a five-point statement agreeing, in effect, to give in to Croatia's key war aims. Mr Babic obliged yesterday saying he was ready to "stand down and demobilise" Krajina Serb forces and to pull them out of Bihac.
The key point for Croatia was that he also agreed to negotiate a political settlement with Zagreb on the basis of the so-called "Z4 Plan". Devised by western diplomats, this assumes Croatian sovereignty over all the disputed region. Croatia may argue that Mr Babic's acceptance of it constitutes de facto recognition of Croatian rule.
Mr Babic also accepted the deployment of UN peace-keepers along the international border between Croatia and Bosnia. He agreed to reopen a vital oil pipeline and to negotiate the reopening of rail links.
Mr Babic is understood to have told Western diplomats that he will be able to convince most of his supporters that they have no alternative but to accept the US-brokered proposals. Knin's forces are heavily out- gunned by the Croatian army, which has bought and built tanks, helicopter gunships and heavy artillery despite the UN arms embargo.
President Slobodan Milosevic of Serbia is unlikely to bale out his clients militarily. Some covert Serbian aid is almost certainly reaching the Krajina Serbs but probably not on the scale that would tip the balance in their favour and scupper Mr Milosevic's campaign to end the economic embargo on rump Yugoslavia. Many observers believe Mr Milosevic and Mr Tudjman have an understanding that Zagreb may pursue its goal of recapturing Sectors North and South if Belgrade is allowed to annex Sector East, the fertile farmland and oilfields close to the Serbian border.
Mr Milosevic failed to help the Krajina Serbs in May when the Croatians seized Serb-held western Slavonia in a two-day offensive, an operation that boosted the confidence of the Croatian army and hardened Mr Tudjman's resolve to retake Krajina. "If the rebel Serbs reject the reintegration of the occupied territories Croatia will be forced to undertake the most severe measures to prevent attacks on the Bihac 'safe area'," Mr Tudjman said.