By Michael Winfrey
SOFIA, Nov 20 (Reuters) - Solving Kosovo's desperate economic situation is crucial to making and keeping peace in the breakaway Serbian province, the head of the NATO-led KFOR peacekeeping force there said on Sunday.
Kosovo has been run by the United Nations since NATO kicked out Serbia's forces in a 1999 air war. Talks to determine its status are set to start on Monday, with the province's ethnic Albanian majority arguing for Kosovo's independence and Belgrade insisting the province is an integral part of Serbia.
Poverty, unemployment, and a lack of foreign investment are fanning ethnic tension in Kosovo and contributing to corruption, crime and violence, Italian Lieutenant-General Giuseppe Valotto said in remarks delivered for him at a conference.
"My biggest concern is the economic situation in Kosovo. The great majority of the population is facing extreme difficulties in this field," he said in a statement delivered by Major General Alberto Notari, deputy chief of staff for the Supreme Allied Command Transformation.
Kosovo Serbs, many living in isolated enclaves, have been the target of sporadic violence since the war, despite the watchful gaze of 17,000 NATO-led peacekeepers.
Kosovo's unemployment rate of around 60 percent is the highest in Europe, and a World Bank report showed 50 percent of the population lives on less than 1.50 euros ($1.75) a day.
The province's ambiguous status -- it operates like a state run by the United Nations but has no formal sovereignty -- means it cannot borrow from international institutions and aid has slowed since the U.N. took control six years ago.
NATO kicked out Serbian forces after a two-year conflict which pitted Belgrade against ethnic Albanian separatist fighters. Serbian forces were accused of killing thousands of civilians in a campaign to drive Albanians from the province.
Analysts also blame graft, a lack of expertise, and a perceived risky environment for the economic malaise.
Valotto, who in September took command of KFOR called for a longer-term Kosovo development strategy.
"The absence of a reliable project on development is a main factor for phenomena such as ethnic tension, crime and corruption, smuggling and other problems," he said.
"It is not normal that six years after the end of the war, and with the oncoming winter, people still suffer from cuts in electricity and water."
Western diplomats have warned of a possible upsurge in violence as talks begin for Kosovo's "final status". Many ethnic Albanians see the process as unnecessary and insulting.
But Valotto said KFOR had recently stepped up patrols and raids to show it would not tolerate violence or intimidation.
"This has been done to send a clear message to the part of Kosovo society... that does not believe in democracy and peaceful cohabitation but think they can solve conflict with violence and abusing the rights of the weak," he said.