Serbia and Kosovo have agreed to normalize economic ties, U.S. President Donald Trump said on Friday, hailing what he called a "major breakthrough" that would help the two Balkan countries prosper after decades of war and failed negotiations.

Both countries - part of the former Yugoslavia - agreed to freeze talks about normalizing political ties for a year to allow the economic agreement to take root, U.S. officials said.

Trump, speaking in the Oval Office as the leaders of both countries signed the agreement, said Serbia had also committed to moving its embassy to Jerusalem, and Kosovo and Israel had agreed to normalize ties and establish diplomatic relations.

Serbian President Aleksander Vucic told reporters there were still many differences between Serbia and its former province, which declared independence in 2008, but said Friday's agreement marked a huge step forward.

Kosovo Prime Minister Avdullah Hoti also welcomed the agreement, and said it should lead to mutual recognition between the two countries, the key issue dividing the two neighbors.

"Serbia and Kosovo have each committed to economic normalization," Trump said, flanked by the two leaders and a host of foreign policy advisers. "By focusing on job creation and economic growth, the two countries were able to reach a major breakthrough."

"After a violent and tragic history and years of failed negotiations, my administration proposed a new way of bridging the divide by focusing on job creation and economic growth," Trump said. "I think it's going to work out very well."

He said the decision to normalize economic ties had taken "tremendous bravery" by both leaders.

The announcement came after two days of high-level talks among the leaders and senior Trump aides, and follows a historic pact, forged by the Trump administration, to normalize ties between Israel and the United Arab Emirates.

Trump has sought to burnish his international deal-making credentials ahead of the Nov. 3 election. He trails Democratic nominee Joe Biden, who was vice president under Barack Obama, in national polls.

The signing of the agreement on Friday was originally scheduled to take place in the White House's Roosevelt Room, with two tables set up for the leaders to sit at and sign. But it was abruptly moved to the Oval Office, with Trump's desk situated between the two leader's tables. Trump's advisers went out of their way to emphasize his role in reaching the deal.

Israeli Prime Minister Benyamin Netanyahu welcomed Kosovo's decision to recognize Israel, and plans by both Kosovo and Serbia to open embassies in Jerusalem.

Serbia would be the first European country to open an embassy to Israel in Jerusalem, and Kosovo the first with a Muslim majority. Only two countries have done that so far: the United States and Guatemala.

Ethnic Albanian-majority Kosovo, which is predominantly Muslim, declared its independence from Serbia in 2008 after a 1999 NATO-led bombing campaign in which the United States took part, to curb a war ignited by years of repressive Serbian rule and to stop ethnic cleansing by Belgrade.

Serbia, backed by its traditional Slavic and Orthodox Christian ally Russia, has refused to recognize Kosovo's independence, a precondition for Belgrade's membership in the European Union.

National security adviser Robert O'Brien, who hosted the meetings, said expanded economic ties, increased border crossings and mutual recognition of professional licenses could pave the way for political solutions in the future.

He said the deal would also lead to increased U.S. investment but gave no details.

A top EU official on Monday said EU-led talks on normalization, which broke down in 2018 but resumed in July, could lead to a deal within months.

The U.S. talks had been slated to take place in June but were delayed after Kosovo President Hashim Thaci was indicted for alleged war crimes during the 1998-99 guerrilla uprising against Serbian rule and its aftermath. He has denied the charges.