New EU member Croatia backtracked in its first row with the bloc's executive Commission on Wednesday, agreeing to fully apply the EU extradition law after Brussels raised the prospect of sanctions.

The European Commission warned Croatia on 26 August it could face legal action, including a possible loss of EU funds, because a few days before its 1 July accession Zagreb changed its laws to prevent the extradition of suspects of crimes committed before 2002, when EU rules were changed.

The government said the aim was to protect veterans of Croatia's 1991-95 independence war from facing potential prosecutions elsewhere in the EU. Several EU member states have the same 2002 time limit, including Austria and Italy.

But facing threats of punitive measures raised by the EU's justice chief Viviane Reding, Prime Minister Zoran Milanovi? and Justice Minister Orsat Miljeni? this week sent conciliatory letters to Reding and Commission President José Manuel Barroso.

"On behalf of my government, the justice minister said that Croatia will take necessary measures to bring the law on judicial cooperation in line with the European legislation it had accepted in accession talks," Milanovi? said in his letter to Barroso, published on the government website on Wednesday.

"Croatia has always fulfilled its obligations and will continue to do so," he said.

A spokeswoman for Commissioner Reding confirmed in Brussels that Zagreb appeared to have backed down.

"The Commission welcomes this constructive approach and now the Commission is in contact with the Croatian authorities to clarify their intention and see that these positive political intentions are swiftly followed by the required legislative action," she told reporters.

The small Adriatic state of 4.4 million people became the EU's 28th member on 1 July, marking a recovery from years of war after Socialist Yugoslavia collapsed in the 1990s.

Earlier this week, the Commission accused Zagreb of contravening EU rules and said its top officials would meet next week to discuss whether punitive action should be taken.

Reding has said this could include some cuts in financial aid to Croatia, which is due to receive billions of euros in the next seven years in funds meant to bring living standards closer to the EU average.

The Commission may also introduce a monitoring mechanism to check Croatia's efforts in complying with EU rules similar to those introduced in Romania and Bulgaria, which joined the EU in 2007, because of their slow progress in fighting corruption.

EU governments could also use the dispute over the European Arrest Warrant as an excuse to delay Croatia's progress in joining Europe's passport-free Schengen travel zone, which Zagreb said was its next priority.

Croatia's opposition HDZ party, which ruled the country in the 1990s and between 2004-2011, has accused the Social Democrat-led government of tweaking EU rules to protect former Croatian intelligence chief Josip Perkovi?.

Perkovi? had worked for communist Yugoslavia's secret service, the UDBA, and led intelligence services after Croatia became independent, and now faces charges in Germany over the 1983 murder of a Yugoslav dissident in Bavaria.

Prime Minister Milanovi? has denied his government's policy had any connection to the German case and said Croatia wanted the same rules in applying the warrant for all members.