The surprise resignation of Prime Minister Ivo Sanader may cost Croatia precious time it needs to bolster its fragile economy and put its European Union accession talks back on track, analysts said on Thursday.

The country may now hold early elections, possibly coinciding with a presidential ballot in January, said analysts, after Sanader resigned on Wednesday in the middle of his second term in office.

Sanader, who did not give reasons for his departure, proposed his deputy, Jadranka Kosor, replace him at the head of a ruling centre-right coalition. She has the backing of a parliamentary majority but it is unclear when President Stjepan Mesic will appoint her prime minister-designate.

Analysts said the key test for the new cabinet, which is unlikely to differ dramatically from Sanader's team, was to draft the series of budget revisions the government was originally expected to draw up by mid-July.

The revisions were expected to include a number of spending cuts which are likely to prove deeply unpopular as the country struggles with a slowing economy and dwindling budget revenues.

"It is imperative that the new government succeeds the old one as soon as possible and assumes responsibility for radical spending cuts," said political analyst Davor Gjenero, adding the government would struggle to survive until the end of its mandate in late 2011 without Sanader at the helm.

"If we opted for early elections now, this would mean a political vacuum of around 90 days. In that case they would start thinking about the budget in October and by that time, the gap would become too big to fill."

POSITIVE SIGNAL

Zdeslav Santic, analyst at Raiffeisenbank, said passing the budget revision as planned would send a very positive signal, but the political upheaval meant it would now likely be delayed.

"The government must move fast, they cannot be granted the usual 100 days. But it is likely that the budget will be late," said Santic.

"It is not certain that they will manage to do it before summer. And the later they do, the more radical spending cuts will have to be."

Many ordinary Croats said they were disappointed by Sanader's sudden exit in the midst of the economic crisis.

"His decision was rash and inappropriate and I am worried. The situation is horrible. People are hungry and have to dig in waste containers for food. That's terrible," said a pensioner called Nikola, looking for bargains at Zagreb's main produce market.

The political upheaval is also expected to have repercussions for Croatia's EU accession talks, which it had aimed to close by the end of the year.

However, its ongoing border row with its EU neighbour Slovenia, which has vetoed more than one third of Croatia's accession talks, had already put that date in jeopardy.

Zeljko Trkanjec, foreign policy editor at Jutarnji List daily, said a possible political vacuum could actually suit the EU which he reckons has grown tired of trying to solve Croatia's border dispute.

"The EU can now relax and stop dealing with our border row. They may even go quiet until they see if we'll have presidential and parliamentary elections, so that they finally know who is in charge here," Trkanjec said.

A European Commission diplomat in Zagreb said the EU would give the new government time to settle in before making a judgement on its performance.

"We hope they will be committed to reforms and EU integration," the diplomat said.