Kosovo has made a controversial decision to ban the use of Serbian currency as of Thursday, in a move that is likely to spark a new crisis.

A chorus of Western countries have already warned that the move could ignite a firestorm in a long series of conflicts with Kosovo's Serb minority.

The roughly 120,000-strong community has clung to the Serbian dinar since the brutal late-1990s war between Serbia and ethnic Albanian insurgents saw Serbian troops and government personnel withdraw from Kosovo.

Many Serbs in Kosovo work for Serbian institutions where their salaries, pensions, and other financial transactions rely on the dinar, rather than the euro which is Kosovo's official currency.

But according to a new set of regulations issued by Kosovo's Central Bank, beginning Thursday "the only currency allowed to be used for carrying out cash payment transactions and in the payment system in the Republic of Kosovo is the euro."

Kosovo unilaterally adopted the euro as its currency in 2002, despite not being a member of the eurozone or the European Union.

Serbia has never acknowledged Kosovo's 2008 declaration of independence, with the two sides perennially locked in bitter disagreements over the most minute bureaucratic matters in the former breakaway province, such as a recent spat over license plates.

'Direct impact'

The Belgrade government has long held major sway with Kosovo's remaining Serbs, in part by offering generous financial and employment packages to residents.

Serbia's budget sets aside roughly the equivalent of 120 million euros ($132 million) annually for spending on Kosovo, with analysts suggesting the real value may be at least double that thanks to informal transactions.

That link will likely come under increased pressure with the new currency scheme, which could effectively lock Serbs using dinars out of Kosovo's financial system.

"Kosovo Serbs will take the biggest blow," Bosko Jaksic, a Belgrade-based political analyst, told AFP. "Diplomatic and political consequences will be far more severe than monetary ones."

Western governments have lambasted the move as inflammatory, warning the regulation would likely destabilize the already tense relations between Serbs and the Pristina government.

"We are concerned about the impact of the regulation in particular on schools and hospitals, for which no alternative process seems viable at the moment," the U.S. embassy in Pristina said in a joint statement issued by the Quint nations.

The so-called Quint – France, Germany, Italy, the United Kingdom and the United States – comprises five NATO members that focus on the Western Balkans.

"The regulation will also have a direct impact on the everyday lives of the overwhelming majority of Kosovo Serbs who receive payments/financial assistance from Serbia," the statement added.

The Quint countries went on to call for "the suspension of the enforcement of the regulation to allow a sufficiently long period of transition."

Turbulent year

The government in Pristina has shown no indication they are prepared to back down on the issue.

"As provided by the constitution and laws, the official currency is only one, the euro," Ahmet Ismaili, the governor of the Central Bank, told media.

Kosovo authorities have presented the regulation as a means to fight corruption, money laundering, and the use of counterfeit currencies.

Kosovo Deputy Prime Minister Besnik Bislimi insisted the regulation would halt the flow of unregulated cash from Serbia, saying that "money continues to be moved across state borders in duffel bags and private cars, and then distributed through unregistered and unlicensed offices."

The Serbian government has slammed the move, with Prime Minister Ana Brnabic saying the regulations would likely derail EU-backed talks aimed at normalizing ties between Belgrade and Kosovo "once and for all."

The regulation follows a turbulent year in Kosovo that saw an armed standoff between Serb gunmen and police at a monastery near the Serbian border in September, where at least four people were killed during the melee.

The bloodshed followed violent rioting earlier in the year after the government installed ethnic Albania mayors in Serb northern areas following elections that were widely boycotted.

Kosovo's largest ethnic Serb party – the Serb List – warned the targeting of the dinar risked escalation, arguing the new regulations endangered "the physical survival of the Serbian people."