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Serbia and its former breakaway province Kosovo reached a landmark reconciliation agreement Friday, after months of talks overseen by the European Union aimed a normalizing relations between the Balkan neighbours.

"Negotiations have ended between Serbia and Kosovo," said EU foreign policy chief Catherine Ashton. "The text has been initialled by both prime ministers."

The agreement, the details of which were not initially published, was reached during the tenth round of tough EU-brokered negotiations between Serbian Prime Minister Ivica Dacic and his Croatian counterpart, Hashim Thaci.

"Serbia's demands have been accepted; I initialled this draft agreement," Dacic told local media after the talks, adding that both sides would formally adopt it in the coming days.

Thaci said the agreement represented "international recognition of Kosovo ... its sovereignty and territorial integrity."

But Serbian Deputy Premier Aleksandar Vucic, who heads the largest party in parliament, dismissed the claim.

"Serbia has not recognized Kosovo with (the agreement) and it never will do that," he told reporters.

Kosovo declared independence in 2008, but Serbia has steadfastly refused to recognize the mainly ethnic Albanian breakaway province.

The foes were under pressure to reach a deal, as a precondition for Serbia's EU membership aspirations and for Kosovo to reach an association deal with Brussels.

"I want to congratulate both prime ministers for the incredible work they have done, the determination and their courage to go forward," Ashton said.

"What we're seeing is a step away from the past and, for both of them, a step closer to Europe," she added.

United Nations Secretary General Ban Ki Moon called the deal a "milestone," while European Commission President Jose Manuel Barroso called on both sides to quickly implement the "historic agreement."

"I am confident that the agreement reached between the two sides will pave the way for (EU member states) to take decisions on the next steps on the European path of Serbia and Kosovo," he added.

EU Enlargement Commissioner Stefan Fule said the "consensual path" taken by Belgrade and Pristina would "help both countries on their paths towards the European Union."

"It is crucial now that the political leadership and general public in both Serbia and Kosovo support the agreement and actively help to implement it," he added.

EU President Herman Van Rompuy also warned that there were "no shortcuts" to the steps needed for both countries to fulfil their EU perspectives. "Concrete results in the implementation (of the agreement) are critical," he said.

A key sticking point had been the degree of independence that should be granted to Serbian-dominated municipalities in the north of Kosovo.

According to Dacic, the deal granted northern Kosovo's Serb minority a parliament, a president and a governing council, full oversight over issues such as education and culture, as well as being able to appoint local police chiefs and judges - moves that Kosovo had feared would lead to separatism.

After achieving their breakthrough, the leaders met with NATO Secretary General Anders Fogh Rasmussen, who said the military alliance was prepared to play a part in the solution.

NATO has maintained its KFOR peacekeeping mission in Kosovo since 1999.

"NATO and in particular KFOR will stand ready to support the implementation of this latest agreement to the best of our ability within our current mandate," Rasmussen said.

According to Belgrade media, Serbia wants a promise that Kosovo's military will not enter the north and NATO to guarantee that over the next 10 years. Pristina reportedly wants the period limited to three years.

Serbs dominate only in scattered enclaves of Kosovo, which has a 90-per-cent Albanian majority. The largest of these enclaves is in the contested north of the country.

In 1998, pre-secession, ethnic Albanians launched an insurgency against the repressive Serbian regime. Violence spiraled out of control, spurring NATO to intervene and oust Belgrade's forces from Kosovo in 1999.

A UN administration governed Kosovo until, on a nod from the United States and other Western powers, it declared independence in 2008.

Serbia rejected the secession and has, with support of its superpower ally Russia, blocked Kosovo's recognition in the UN and other international bodies.

But Belgrade bowed to pressure from EU and agreed to open talks aimed at normalizing relations in the region in March 2011. The talks were elevated to the level of prime ministers in September.