BELGRADE (Reuters) - Serbia said it would put off initialling an agreement that groups Balkan countries together with Moldova in one free trade area, for fear of damage to its tobacco industry.

The Central European Free Trade Agreement (CEFTA) is aimed at making countries more competitive and attractive for foreign investors by creating a single market of some 25 million people.

It was due to be signed by all prospective members by the end of this year.

«We have decided not to initial the CEFTA agreement for now because we have assessed that it is not in our interest at this moment,» Minister for Foreign Economic Relations Milan Parivodic told reporters.

Parivodic said the move was meant to protect the domestic tobacco industry. Three major international firms have invested in Serbia and want to see return on their investment. Belgrade has also pledged to protect them until 2009.

Once a member of CEFTA, Serbia will have to lower excise duties for imported cigarettes to the same level as domestic cigarettes, which Parivodic said would certainly hurt the domestic industry.

Serbia offered to nominally lower excise duties but add the same amount to customs duties, he said.

«We have a great desire to initial the agreement as soon as possible, as soon as our friends from the neighborhood, and here I put an emphasis on Croatia, agree to the fair and balanced conditions we are offering,» Parivodic said.

Serbia's cigarette exports to Croatia are zero. Croatia exports some 9 million euros worth of cigarettes to Serbia, with the number rising steadily, Parivodic said.

He said that even if customs duties were increased they would still be lower than Croatian customs duties on cigarettes.

Serbia, Bosnia, the Former Yugoslav Republic of Macedonia, Montenegro and Albania have been very keen to win CEFTA membership, which would facilitate trade and investment in the Balkans. Croatia, wary of any Balkan associations reminiscent of the former Yugoslavia, from which it seceded in 1991, insisted on bringing in other countries.