Yugoslav President Mr Vojislav Kostunica said today he would start talks on the federation's future after elections in Montenegro gave only a narrow victory to a pro-independence coalition.
Mr Kostunica said a move now towards independence by Montenegro, Serbia's estranged smaller partner in the two-member federation, would be the least acceptable course of action.
"With this in mind I will launch an initiative to start a dialogue of competent bodies in Serbia and Montenegro to find a solution which would make the Federal Republic of Yugoslavia acceptable for both its federal states," he said.
The statement by Mr Kostunica, a Serb, is likely to please Western powers, which have been urging Serbs and Montenegrins to find a mutually acceptable solution to their differences.
Western officials have also made clear their preference for a reformed federation, fearing Montenegrin independence could trigger breakaway moves in internationally run Kosovo and in Bosnia and Macedonia.
Yesterday, Montenegrin President Mr Milo Djukanovic said his coalition's slim victory in Sunday's parliamentary elections meant he would tread cautiously on independence.
But he said there would be a referendum on Montenegro's relations with Serbia at some stage and has also made clear he continues to favour a loose alliance of independent states - an idea already rejected by Serb and Yugoslav officials.
The proposal calls for a reformed federation with more joint functions that Mr Djukanovic wants. The Montenegrin president argues his republic will always be dominated by Serbia, which has 10 times the population, unless it is independent.