Belgrade  -  Serbia and Italy's giant carmaker Fiat Tuesday signed a protocol moving them a step closer to the 1-billion-dollar privatization of Serbia's moribund automobile factory, Zastava.

According to the deal signed with Zastava labour unions, Fiat has agreed not to lay off workers, who would also receive backlog salaries totalling 10 million euros and other benefits.

In return, local authorities agreed to tax and investment incentives including land for installations free of charge over the first decade of the investment.

Fiat and Serbia last week signed a letter of intent on a joint venture envisaging a 700-million-euro (1.08-billion-dollar) investment by Fiat, for its 70-per-cent stake in Zastava.

Serbia would pour an additional 100 million euros into the firm, which had effectively stalled with the disintegration of the former Yugoslavia in 1991 and the loss of its market.

The crisis of Zastava, has dragged the entire region around Kragujevac, a prosperous industrial town in former Yugoslavia, into deep economic depression lasting two decades.

The ambitious plan to put out 300,000 A- and B-segment cars from Zastava by late 2010 would lead to a turnaround in the region, Serbian officials said.

Fiat opted for the Zastava purchase despite May 11 snap polls in which Serbia votes either for a pro-European bloc or for their nationalist rivals, who oppose closer ties with the West over the Kosovo policy of big powers.

Among else, hinging on the elections is the stabilization and association agreement that Serbia has signed en route to EU membership. Nationalists, who lead in popularity surveys, said they want the deal annulled.

"This is a start of a big project," Fiat vice-president Alfredo Altavilla said in Kragujevac, 120 kilometres south of Belgrade. "We're committed to it regardless of the outcome of the elections."

He hinted that the Italian brand may place the entire production of one of its models in Zastava, with which Fiat has cooperated since the 1950s. (dpa)