Croatia's allegations against Serbia of genocide during the early 1990s will be heard at the International Court of Justice, the court has decided.
Judges at the UN's highest court in The Hague voted by 10 to seven that it had the jurisdiction to hear the case.
Croatian sources say that 20,000 Croatians died in the conflict, while hundreds of thousands of Serbs living there were displaced.
This will be only the second genocide case to come before the court.
The first was also brought against Serbia - by Bosnia. Serbia was cleared in that case.
A date for hearing Croatia's complaint has yet to be set.
Serbia had argued that the court had no jurisdiction to hear Croatia's case.
It said the former Federal Republic of Yugoslavia was not party to the UN's genocide convention nor even a member of the UN when the complaint was filed.
Most of the alleged crimes were committed before the current republic was formed, it also argued.
However, ICJ judge Rosalyn Higgins said the 17-strong panel had dismissed Serbia's challenge to the court's competence.
Croatian Justice Minister Ivan Simonovic described the ruling as "a great legal success", but stressed that it was "just the first round".
His country's legal action was intended not "to live in the past but to build healthy foundations for the sustainable future of the region", he said.
Serbian Justice Minister Snezana Malovic, meanwhile, said her country was "still considering all options including out of court settlement and filing a counter suit".
"However, we hope that the court's final decision will be in Serbia's favour," she added.
Croatia first filed the complaint in 1999, accusing Serbia of "a form of genocide which resulted in large numbers of Croatian citizens being displaced, killed, tortured, or illegally detained as well as extensive property destruction".
It referred to crimes committed "in the Knin region, and in eastern and western Slavonia and Dalmatia".
In February 2007, the ICJ cleared Serbia of direct responsibility for genocide during the Bosnian war.
However, it said Serbia had broken international law by failing to stop the killings.
6 months ago