Croatia's new prime minister is pledging to improve relations with former enemies and to end a trade war with Hungary. The new prime minister's statements are being closely monitored by the international community amid concern about his nationalist cabinet.

Croatian Prime Minister Ivo Sanader says his Croatian Democratic Union, has abandoned what were seen as its hard-line policies under the late party founder and Croatian President Franjo Tudjman.

But observers point out that Mr. Sanader's cabinet, approved by parliament on Tuesday, includes veterans of Mr. Tudjman's controversial regime, which ruled during the 1991-to-1995 war for independence from Serbian-led Yugoslavia. During that war many Serbian civilians were expelled or forced to flee.

Mr. Sanader says he is determined to change the party's image. He points out that he has managed to secure backing from a party representing the Serbian minority in exchange for pledges to return property to Serb refugees and to encourage their return from exile.

The United Nations refugee agency estimates that some 280,000 ethnic Serbs fled Croatia during the Serbo-Croatian conflict, and that so far only about 100,000 have returned.

And in a major break with the past, Mr. Sanader has promised to improve relations with former enemies Serbia and Montenegro, the loose union that replaced Yugoslavia, as well as with Bosnia-Herzegovina and Slovenia.

In addition Mr. Sanader has suggested he wants to end an ongoing trade war with neighboring Hungary.

Hungary scrapped favorable tariff rates on nearly a quarter of Croatian products, after Croatia refused to lift a ban on Hungarian livestock and meat imports. The ban was imposed several months ago because of alleged fear of Mad Cow disease.

On the domestic front, Mr. Sanader has said his priorities include cutting taxes, external debt and unemployment. Croatia's growing external debt is estimated at more than $21 billion, or 74 percent of its annual gross domestic product. Nearly one in five Croats of working age is reported to be without a job.

The policies are seen as part of Croatia's efforts to join the European Union and NATO by 2007. Those organizations want to see an end to tension in the volatile region.

But European Union diplomats have made clear Croatia must also adequately deal with its past, including the handover of key war crime suspects to the United Nations Tribunal in The Hague.

Among the most wanted Croats is the fugitive General Ante Gotovina, who is accused of participating in the massacre of at least 150 ethnic Serbs during the 1990s.