STOCKHOLM, Nov 4 (Reuters) - Slovenia and Croatia signed a border arbitration agreement on Wednesday, paving the way for the two countries to clear up a nearly two-decade-old dispute that has held up Croatia's European Union bid.

Slovenian Prime Minister Borut Pahor and Croatian Prime Minister Jadranka Kosor signed the deal in Stockholm following a decision by the Croatian parliament earlier this week to back it.

Sweden, which currently holds the presidency of the European Union, had invited the prime ministers of the former Yugoslav republics to the Swedish capital to sign the agreement.

EU member Slovenia blocked Croatia's EU entry talks last December because of unresolved border issues. In September, it lifted a veto and allowed Zagreb to resume membership talks after the two prime ministers agreed to resort to international arbitration.

Sweden has made enlargement of the 27-member bloc a priority during its six-month presidency and believes the deal will enable progress in Croatia's accession negotiations.

The dispute involves a sliver of land on the Istrian peninsula in the northern Adriatic and demands by Slovenia -- squeezed between Italy and Croatia -- to have direct access to international waters, which could force Croatia to cede some of the sea it sees as its own.

Following signature by the prime ministers, it must be ratified by national parliaments, where opposition parties have expressed dissatisfaction in both countries. Keywords: CROATIA SLOVENIA/BORDER

(Reporting by Nick Vinocur; writing by Mia Shanley, editing by Mark Trevelyan; mia.shanley@thomsonreuters.com; +46-8-700 1004)

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