DOZENS of soldiers dressed in mysterious uniforms with no insignias last week packed streets and cafes in this small Bosnian town just over the border from Croatia and near Serb front lines.
A few days later, Bosnian Serbs suffered one of their largest military defeats of the three-year-old war in Bosnia.
In a move that will dramatically test whether United States policy is shortening or inflaming the conflict in the former Yugoslavia, the powerful Croatian Army has crossed into Bosnia and dealt a massive blow to the Bosnian and Croatian Serbs.
The risky Croat offensive is in some ways the culmination of years of US diplomacy. It appears to be part of an effort to take back territory seized by Serbs in Croatia in 1991 and help the Muslim-led Bosnian government. But UN officials warn that the Croat offensive could lead to a massive escalation of the conflict and an American-led UN withdrawal.
''The [Croatian] troop movements and troop concentrations are very menacing,'' UN Special Representative Yasushi Akashi said on Saturday. ''There is a good chance of war.''
In a stunning defeat for the Bosnian Serbs, 8,000 to 10,000 Croatian Army troops took 50 square miles of Bosnian Serb territory and captured the strategic towns of Grahovo and Glamoc on Friday.
The seizure of Grahovo cuts off the main supply route between the nearby Croatian Serb ''capital'' of Knin and its fellow Serbs in Bosnia and Serbia to the east. With an additional 1,000 to 4,000 Croatian troops poised to attack Knin from the west, Croatian President Franjo Tudjman issued an ultimatum yesterday that the nearly surrounded Croatian Serbs begin ''serious'' peace negotiations or their territory will be taken by force.
Bosnian Serb leader Radovan Karadzic has declared martial law nationwide for the first time in the conflict and ordered a top Bosnian Serb general to launch a counteroffensive and retake the strategic towns.
In a more ominous sign, Bosnian Serb leader Momcilo Krajisnik ''urged Yugoslavia to actively engage itself'' according to a statement by a television station in Serbia's capital, Belgrade.
The Croatian dominated stand-off is the result of steady US and German backing for Croatia, which has greatly strengthened its military since rebel Croatian Serbs seized control of nearly a third of the country in 1991. Croatia has achieved the ''strategic balance'' - or military power - that ''hawkish'' US officials had hoped would bring Croatian Serbs to the bargaining table.
US supporters of unilaterally lifting a UN arms embargo against the Muslim-led Bosnian government say the same tactic - giving the Muslims military parity with the Bosnian Serbs - will eventually lead to serious peace talks in Bosnia. The Muslim-Croat federation, brokered by the US last March, ended fighting between the two groups in Bosnia and is designed to result in greater military cooperation between Muslims and Croats against the Serbs.
But UN and European officials bitterly accuse the US of making simplistic and naive assumptions about the Balkans that are now on the verge of inflaming the entire region. Thanks to signals from Washington - including last week's vote by the US Senate to lift the arms embargo against Bosnia's Muslims - both the Croatian and Bosnian governments may now believe their conflicts with rebel Serbs can be settled militarily.
''I think they're being misinformed,'' says a UN military official. ''The [US] is giving them all the wrong signals.''
Expecting rebel Serbs in Croatia and Bosnia to simply back down when faced with a powerful military foe is unrealistic and a recipe for a wider conflict, according to UN and European officials. The Bosnian and Croatian governments may also not be able to quickly or easily defeat rebel Serb forces.
But events yesterday seemed to support a hawkish Croatia policy.
UN officials reported that 1,300 Croatian Serb troops have pulled back from Bihac and are apparently headed south to defend Knin. More importantly, a statement issued by the Yugoslav Federal Government - which Serbia dominates - called for an immediate cease-fire on Sunday, but made no mention of military assistance for the Croatian Serbs.
Serbia's entry into the conflict would vastly escalate and almost certainly result in a UN withdrawal from the former Yugoslavia that would involve 25,000 US troops.
In the end, whether thousands of American ground troops are placed in harm's way in Bosnia may depend on whether US policymakers have correctly calculated that the Serbs will back down to Croatia and that Serbian President Slobodan Milosevic will abandon the Croatian Serbs.
''I believe the Croatians are preparing seriously for war,'' UN spokesman Chris Gunness said.