The accord preserves the alliance of Serbia and Montenegro as the last of the six republics that once made up Yugoslavia. Before the wars in the 1990s, the federation also included Bosnia, Croatia, Macedonia and Slovenia.
The lower chamber of the parliament voted 84-31, confirming an earlier 26-7 vote in the upper chamber.
Serbia and Montenegro opted in 1992 to stay together as a rump Yugoslav federation. But the relations of the two republics have since soured -- especially under the former federal president Slobodan Milosevic -- and the EU last year mediated a deal aiming to prevent new upheaval in the volatile Balkans.
The agreement envisages almost complete sovereignty for the two republics, which will be linked only by a small joint administration running defence and foreign affairs. Serbia's capital, Belgrade, will remain the capital of the whole country.
"It is in the interest of both Serbia and Montenegro to stay together," said Serbia's vice-premier Miodrag Isakov, acknowledging that the republics "could go either way from here... creating a truly functional union or going completely separate ways."
The deal allows Serbia and Montenegro to hold referendums on full independence in three years.
The arrangement is meant to appease a strong independence movement in Montenegro, the smaller republic. Montenegro's leadership began boycotting federal institutions in 1998, prompting some Serbs, too, to demand a separation.
Nationalist parties in both Serbia and Montenegro have opposed the reform, citing the need to preserve deep historical ties between the republics. Others, demanding outright separation, criticised the plan for not going far enough.
"What you are doing here is a coup," Serbia's ultranationalistleader Vojislav Seselj said to other lawmakers, describing the reform as a de-facto dissolution of the country.
"We are burying Yugoslavia today," said lawmaker Aleksandar Simic of Milosevic's Socialist party. "I think it was a good country and I don't know why so many remain keen to destroy it."
But Dragisa Pesic, the departing prime minister of Yugoslavia, praised the new arrangement as "beneficial for both Serbia and Montenegro that puts an end to the disintegration in the region."
Yugoslavia was first founded in 1918 as the Kingdom of Serbs, Croats and Slovenes. The former kingdom became a Communist-run, six-republic, federation after World War II.
The state reform leaves Yugoslav president Vojislav Kostunica -- who ousted Milosevic at an election in 2000 -- without an official position.
"We now look forward to the early... establishment of the new institutions," said Britain's Foreign Office Minister Denis MacShane in a statement, praising Tuesdays' development as a "significant step forward by which Serbia and Montenegro towards closer integration with Europe."
http://www.cnn.com/2003/WORLD/europe/02/04/yugoslavia.end.ap/index.html