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By Igor Ilic

ZAGREB (Reuters) - Croat war veterans on Tuesday lost their bid to hold a referendum that would have tightened restrictions on the use of Cyrillic language signs in areas of Croatia populated by the Serb minority.

While their referendum would have applied to whole country, the group has specifically opposed the Social Democrat-led government's efforts to put up such signs in Vukovar, where inter-communal tensions still smoulder, gathering more than 500,000 signatures to support a vote.

Parliament put the question of holding the referendum to the Constitutional Court, which said it would violate the country's constitution.

Currently, Cyrillic letters, like those used in Russia, are allowed in the areas of Croatia where Serbs amount to at least a third of the population, alongside the Latin script used by Croats and in much of Europe.

The referendum proposed by the veterans from Croatia's 1991-95 war, organised into the group "For the Protection of Croatian Vukovar", wanted to increase that proportion to half.

The fall of Vukovar on Nov. 18, 1991, has become a cornerstone of Croatia's modern history and the veterans demand special status for the town.

Yugoslav federal army forces and regional Serb militia, who refused to accept Croatia's independence, captured the market town on the banks of the River Danube after reducing it to rubble in a brutal three-month siege.

According to the 2011 census, Serbs make up a little over a third the population of the town, compared with fewer than 5 percent in the rest of the country as a whole.

The bilingual signs the government put up on official buildings in Vukovar have been destroyed or damaged several times in the past 12 months.

The court quashed holding the referendum, but opened the possibility of tighter rules for the town.

"The referendum question is not in line with the constitution and the referendum will not be held. However, the city authorities in Vukovar have one year to regulate where the bilingual signs can be put," Judge Miroslav Separovic told state radio.

The veterans said they may now try to win support for their push at the European Court for Human Rights in Strasbourg.

Serbs are the most sizeable ethnic minority in Croatia, which also has a number of other minority groups, including Italians, Hungarians and Bosniaks.

Croatia was expected to demonstrate it was protecting its minorities and human rights before it became a member of the European Union in July 2013.

(Editing by Alison Williams)

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