By Matt Robinson

BELGRADE (Reuters) - A Serbian court on Thursday rehabilitated World War Two royalist commander and convicted Nazi collaborator Dragoljub 'Draza' Mihailovic, a move condemned by neighboring Croatia as comparable to forgiving Hitler.

Almost 70 years after his execution, ardent Serbian nationalist Mihailovic remains one of the most divisive figures of Balkan history.

An officer in the royal army when Nazi forces invaded, Mihailovic led a royalist resistance movement before exploring collaboration with the occupiers against their common enemy, the Communist partisans of Josip Broz Tito.

After a complex period of shifting alliances still argued over today, Tito prevailed and in 1946 Mihailovic was captured, tried and sentenced to death for war crimes and collaboration.

Mihailovic was secretly executed in Belgrade, the whereabouts of his grave still a mystery.

His 'Chetnik' fighters were consigned to history as bloodthirsty quislings, only for the movement to re-emerge as Yugoslavia unraveled in war in the 1990s. The name, insignia and trademark beards were adopted by some Serb paramilitaries as they fought to carve out a Greater Serbia.

In 2010, Mihailovic's grandson, Vojislav, petitioned the courts for his legal rehabilitation, arguing that his grandfather had fought Nazis, communists, and Nazi quislings alike while awaiting an Allied victory to rise up against the German occupiers.

Judge Aleksandar Tresnjev said Mihailovic's conviction was unsound.

"Besides the fact he did not have a fair trial, the case against Mihailovic was politically motivated given the fact that representatives of the executive branch interfered not only in the conduct of the trial but also in the decisions taken," he told the court.

Oliver Antic, an adviser to nationalist Serbian President Tomislav Nikolic, was part of the legal team arguing Mihailovic's case.

Neighboring Croatia, where Mihailovic is considered a war criminal for the killing of Croats, Muslims and communist partisans by members of his Chetnik movement in Serbia, Bosnia and Croatia, expressed horror.

Story continues

"This is a huge mistake, comparable to rehabilitating Hitler, Mussolini or Pavelic," Croatian Justice Minister Orsat Miljenic told reporters, referring to the leader of the WWII fascist puppet state in Croatia, Ante Pavelic.

"For us, Draza Mihajlovic was and remains a criminal. He was a fascist, and that's it," he told reporters.

"It is up to Serbia to decide whether it wants to build its future on the legacy of anti-fascism, like the rest of Europe, or on something else," he said, alluding to Serbia's aim of one day joining Croatia in membership of the European Union.

(Additional reporting by Aleksandar Vasovic and Ivana Sekularac in BELGRADE and Igor Ilic in ZAGREB; Writing by Matt Robinson Editing by Jeremy Gaunt)