European Commission sources told Reuters on 12 September that Brussels might punish Croatia as early as this week in a row over the extradition rules, which has marred the first months of the Balkan state's EU membership.
Sanctions would threaten the EU's aid programme for Croatia, notably for border control improvements vital to the country's bid to join the bloc's passport-free Schengen zone, the sources said.
A few days before Croatia joined the EU on 1 July, it changed the law to effectively ensured that veterans of the independence war could not face prosecution elsewhere in the EU.
The Commission has threatened to invoke an article in Croatia's accession treaty known as the safeguard clause, which allows Brussels to impose punitive measures if EU rules are broken.
According to the radio, the government will propose changes to the extradition law this week and parliament could approve them before the end of the month.
Government officials were not available for comment, but a senior parliamentary official and member of the ruling Social Democrats, Pedja Grbin, said the procedure should not take too long.
"Changing of a law is not a complex procedure," he said.
The government promised last month to apply the European Arrest Warrant in full from next year, in an effort to avoid sanctions, but the EU's top justice official, Viviane Reding, said the promise was not enough and demanded swift action.
She said the lack of compliance could lead to delays in the country joining the Schengen zone, which Zagreb has said is a priority.
Tweaking the rules
No inquires against Croatian war veterans have been launched anywhere in the EU.
But the country's opposition HDZ party, which ruled in the 1990s and between 2004-2011, has accused the leftist-led government of tweaking the rules to protect former Croatian intelligence chief Josip Perkovic.
Perkovic worked for communist Yugoslavia's secret service, the UDBA, and led intelligence services after Croatia became independent. He faces charges in Germany over the 1983 murder of a Yugoslav dissident in Bavaria.
Prime Minister Zoran Milanović has denied any link to the German case and said Croatia had only sought to exercise the same privileges as its EU peers.
EU members could request exemptions from the European Arrest Warrant before 2002, but the Commission says that only applies to states that were in the bloc at the time. Croatia could have asked for exemptions when it was negotiating its entry to the EU, but did not do so.
