(Adds comment from U.N. diplomats, paragraphs 8-10)

PRISTINA, Serbia, July 5 (Reuters) - The progress made in Kosovo since a 1998-99 war risks unraveling without a decision on the Albanian majority's demand for independence from Serbia, U.N. Secretary-General Ban Ki-moon says in a report.

Russia has blocked the adoption of a Western-backed U.N. resolution that would effectively set Kosovo on the path to independence eight years after NATO wrested control of the province from Serbia.

Kosovo's leaders have threatened to declare independence unilaterally, a step that could shatter the unity of the European Union on the major remaining post-war question in the Balkans and send shockwaves across the region.

"If its future status remains undefined there is a real risk that the progress achieved by the United Nations and the Provisional Institutions in Kosovo can begin to unravel," Ban says in a report due to be presented at the U.N. Security Council on Monday.

"The determination of Kosovo's future status should therefore remain a priority for the Security Council and for the international community as a whole," he added in the report made public by the world body.

Kosovo's 2 million Albanians -- 90 percent of the population -- are growing increasingly impatient for independence, having been promised a decision by the West by mid-year.

NATO powers with 16,000 soldiers in the territory fear unrest, but Russia has threatened to veto any effort to endorse its secession at the United Nations.

NEW DRAFT?

In New York, diplomats from several countries said Western capitals were discussing a possible new draft resolution that would appeal more to Moscow. "We are looking at ways of trying to bring Russia into the process," one said.

Russia's main objection to the existing draft is that despite an offer of 120 more days of negotiations between Kosovo Albanians and Serbia, it still effectively makes independence for the province automatic if those talks fail.

Diplomats said ideas included extending the talks period up to 150 days and promising a review thereafter of where the parties stood. But they said Western countries remained committed to eventual independence for Kosovo.

Kosovo has been run by the United Nations since 1999, when NATO bombed to drive out Serb forces and halt the slaughter and expulsion of Albanian civilians in a two-year war with separatist guerrillas.

Kosovo's ethnic Albanian prime minister, Agim Ceku, told Reuters on Tuesday his government would be "forced to move" without progress on the issue at the United Nations.

Ban said Albanian expectations of winning independence "in the near future" remained high.

His regular report, covering the past four months in Kosovo, paints a bleak picture of poverty and continued ethnic division between Albanians and the 100,000 remaining Serbs.

"The process of full reconciliation and integration of Kosovo's communities will be a long-term one, and remains an uphill challenge," Ban wrote.

(Additional reporting by Patrick Worsnip at the United Nations)

AlertNet news is provided by