The sunny corner of the Adriatic that is casting dark clouds over Europe

It is a sliver of coastline between two of the smallest states in Europe, boasting breathtaking views across the Bay of Piran and towns full of winding cobbled streets and Venetian Gothic architecture, but this picturesque corner of the Adriatic is casting a shadow over EU expansion plans.

Slovenia and Croatia are at loggerheads over their border and the diplomatic stand-off is threatening to derail Croatia's hopes of joining the EU.

The dispute dates to the break-up of the former Yugoslavia in the early 1990s, when both countries laid claim to the Bay of Piran, a seven-square-mile expanse of the Adriatic sea.

Croatia wants the border to be drawn down the middle of the bay but Slovenia – which is almost landlocked –says this would impede its ships from gaining direct access to the high seas.

In one tavern perched on the disputed border, customers can knock back pear brandy and roast pork dinners in one country and then use the bathroom in the other. Its owner, Sasha Kalin has even gone so far as to paint a fluorescent yellow line along the floor, marking the frontier between Croatia and Slovenia. Visitors may chuckle at the stunt, but the border issue is a row that has risen to the top echelons of European politics.

Yesterday, the EU's foreign ministers took up the baton, trying to get a deal to solve the festering dispute and warning that it was weighing down the entire EU enlargement process. Slovenia was the first former Yugoslav country to join the EU, in 2004. Late last year it thwarted Croatia's plans to join the group by turning the border issue into a key bargaining chip.

"There is pressure on both of them [to solve this]," said the Czech Foreign Minister, Karel Schwarzenberg, who chaired yesterday's meeting. "They know the conditions, they have to accept the mediation offer."

The plan on the table now would see the dispute arbitrated by five judges, including one Slovene and one Croat. This would avoid lengthy legal proceedings at International Court of Justice at The Hague and is considered to be Croatia's only hope of joining the EU by 2010 as planned.

"It has now reached a crucial moment for both countries and the EU," said the European commissioner for enlargement, Olli Rehn.

"We have done 26 miles of the marathon and have reached the stadium. It's important that we don't give up and keep the momentum going.

"I expect positive responses shortly from the two countries to my proposal," Mr Rehn said.

But the prospects of a swift breakthrough are not encouraging. According to diplomats, the Slovenian Foreign Minister, Samuel Zbogar, appeared deaf to calls to resolve the issue by early next week, despite growing accusations that his country was unfairly holding Croatia to ransom and discrediting the neutrality of the EU's accession process. "The Slovenians are clearly in no mood to be pushed around," said one EU official.

And the plan is unlikely to receive much backing from other EU member states, many of which have little or no appetite for newcomers, because of the recession that is battering the continent and the fiasco over the premature entry of Romania and Bulgaria two years ago.

The Dutch, who are famously cautious when it comes to expanding the EU towards the Balkans, said they were concerned that the issue was overshadowing more serious concerns about Croatia's membership. One EU diplomat said: "We are more worried about things like corruption and lack of press freedom. That is what we should be looking into, not a border row."

Germany's Chancellor, Angela Merkel, has also warned against further EU enlargement. Her Christian Democrats party states in its manifesto for upcoming European Parliament elections that it "has required great efforts" from the EU to add the most recent members, a reference to the desperate economic woes afflicting countries such as Latvia and Hungary, which joined during the large major round of enlargement in 2004.

The party has called for "a phase ... during which a consolidation of the EU's values and institutions should take priority over further EU enlargement".