BELGRADE, Yugoslavia -- Nationalist Croatian President Franjo Tudjman, signaling a readiness to compromise, named two Serbs to government posts in his hard-line government and endorsed European Community peace efforts.
In a speech to an emergency session of the Croatian Assembly in Zagreb, Tudjman reaffirmed his insistance on Croatia's independence, but said it 'would enter an all-out war only in the case that we cannot avoid it.'
He did not mention a proposed truce plan announced by the eight- member Yugoslav collective presidency early Thursday in Belgrade giving Tudjman two days in which to take a position on the proposal. The presidency said in a statement that it would convene again Friday to iron out details.
Ethnic unrest persisted, with doctors in the eastern Slavonija district headquarters town of Osijek saying three Croatian policemen were killed and another 20 wounded in a clash with rebel Serbs fighting against the inclusion of their areas in Tudjman's drive to create an independent Croatia.
Doctors said at least one Serb was killed and two wounded in the clash at Dalj, just northeast of Osijek about 100 miles northeast of Belgrade. The fighting ended with the intervention of the Yugoslav federal army.
Federal army units also moved into the town of Kostajnica, 60 miles southeast of Zagreb, the Tanjug news agency said. The town was abandoned by Croatian units Wednesday after several days of fighting with rebel Serbs pursuing an offensive to take control of the surrounding Banija region.
Mortar duels were reported overnight in several areas of Croatia where Roman Catholic Croats and Christian Orthodox Serbs live side by side.
The ethnic strife, fanned by nationalist leaders of Serbia and Croatia, has killed more than 300 people in the past year and is threatening to plunge the multi-ethnic federation of 23 million into a full-scale civil war.
Tudjman, an extreme nationalist, again accused Marxist-ruled Serbia of backing rebel Serbs in a plan to annex their areas and create a 'Great Serbia.' He said the Serb-dominated federal army is helping Serbia wage 'a conquering war in Croatia.'
'We must resist further conquests of our territories,' Tudjman said in the wake of significant gains this week by the Serbian offensive to take control of the central Banija region and merge it with the self- declared Serbian Autonomous Region of Krajina in western Croatia.
But he said Croatia cannot declare a full-scale mobilization because it cannot afford to arm the 3.7 million Croats in the republic. About 600,000 of Yugoslavia's 8.3 million Serbs live in the republic and fear persecution in an independent Croatia.
Tudjman said Croatia, which joined Slovenia in declaring independence from the six-republic Yugoslav federation June 25, will hold talks with three EC foreign ministers this weekend in hopes of reaching a 'democratic settlement' during an EC-brokered three-month moratorium on their secession that expires on Oct. 1.
'We shall try with a new EC mission, with their peace-making intitiative to find a way out ... so that with their help we could materialize Croatian sovereignty and independence.
Croatia has 'not accepted involvement in an all-around war against Serbia and the Yugoslav army because we still think that all possibilities have not yet been used to avoid such a war,' Tudjman said.
But he added: 'If we cannot make it in a democratic way, we shall defend the sovereignty of Croatia with all our people. We shall go into an all-out war only in case if we cannot avoid it. And, I hope with assistance from the international community, we would win that war.'
He said the Cabinet shakeup was to create a 'new government of experts and democratic unity.'
In overhauling the bulk of the 23-member Cabinet, Tudjman replaced his prime minister and the ministers of defense, interior, foreign affairs and information, dumping incumbents known for their ultra- nationalist views on dealing with the Serbian uprising.
Two Serbs, one given an at-large portfolio and the other made deputy health minister, were among seven members from four opposition parties named to the Cabinet. A Muslim was made a minister without portfolio.
The changes and Tudjman's uncharacteristically moderate speech appeared to indicate a desire for a truce and a willingness to hold negotiations on demands for autonomy by rebel Serbian enclaves.
An agreement on a truce plan had foundered on disagreement over the role of the federal military.
Croatia had demanded that a truce be followed by an immediate return to barracks by federal troops. A majority of federal presidency members, however, insisted on the demobilization of ethnic militias and Croatia's fledgling army, the Croatian National Guard, prior to a withdrawal to bases by the army.
A truce is among the conditions set by the European Community for extending further help to finding a negotiated resolution to the future of Yugoslavia.