(BELGRADE) - Serbia's fragile economy could pay the price if nationalists win Sunday's general elections, depriving it of the benefits of European Union rapprochement, analysts warn.

The Radical Party (SRS) and caretaker Prime Minister Vojislav Kostunica's Democratic Party of Serbia (DSS) have vowed to annul a so-called Stabilisation and Association Agreement with the EU, signed last week by pro-European Serbian leaders.

Eurosceptic nationalists like Kostunica are opposed to signing the SAA, seen as a first step to EU membership, unless the 27-nation bloc acknowledges the breakaway province of Kosovo remains within Serbia's borders.

"If the SRS and DSS annul the signature of the SAA, that will literally mean freezing it for an indefinite period of time," said economic analyst Misa Brkic.

"That would certainly mean a lack of foreign investment, increased inflation and fall of the dinar (national currency), which eventually means self-isolation for the country," Brkic said.

Foreign investment, desperately needed to help an economy devastated by wars and sanctions in the 1990s, has already been pegged back by a political crisis prompted by Kosovo's independence.

Pro-European forces say economic development depends on EU integration, while nationalists counter it will not be affected by cooler relations with Brussels.

All admit, however, that Serbia will suffer unless it keeps attracting investment of around 4.0 billion euros (6.2 billion dollars) each year and maintains economic growth of seven percent.

Serbia's economy has already been shaken by the political turmoil that followed Kosovo's declaration of independence on February 17.

Along with rising inflation and a weakened dinar, the main index on the Belgrade Stock Exchange, the BELEX-15, has since plunged 26 percent.

The outgoing economy minister, pro-European Mladjan Dinkic, has warned that a number of investors have already given up on planned projects, while others were waiting to see the outcome of the elections.

Anxious to assure the hesitant, the Radical Party says it has already offered "guarantees to foreign investors."

"Those who want to employ our people will have the most liberal business conditions," Jorgovanka Tabakovic, the party's economic expert, told the newspaper Politika.

"Our economic model would be called a small and open economy in which the state will have an active role," she said, adding: "The state has to have its part in the banking sector but also majority ownership of state companies."

Brkic fears such a policy would upset mirco-economic stability, painstakingly restored in the eight years since the overthrow of late president Slobodan Milosevic.

"After a growing political crisis, the inflation rate has already reached more than 13 percent, double the prediction for this year, but in case of an SRS government, the inflation rate would rise even more," he warned.

On the other hand, a pro-European alliance spearheaded by President Boris Tadic's Democratic Party (DS) has promised to speed up the country's EU integration in government.

The day after the signing of the SAA with the European bloc, Italian carmaker Fiat signed a memorandum of understanding to buy Serbian counterpart Zastava and invest 700 million euros (one billion dollars) in its plant.

A formal deal is to be signed in the coming months, Fiat said in a statement at the time.

"If the Radicals win, Fiat will not come. Neither would other investors," Brkic said.

Another analyst, Stojan Stamenkovic, agreed the outcome of the elections would crucially influence the deal.

"If the SAA is ratified, the deal will be signed, but if the parties who pledged to annul it come to power, and they have a good chance of winning the polls too, I am afraid there will be no business with Fiat," Stamenkovic said.

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