Developers hope the stunning cliffs rising above the clear waters of the Adriatic in central Montenegro will entice investors to put millions into luxury apartments in an ambitious holiday development.

Yet the site, a former military base, remains a cluster of shelters and bunkers littered with old army supplies, and no one is rushing to lay down €8 million for a villa, or rather less for an apartment.

At the same time, hotels and restaurants along what was once the Yugoslav coastline are cutting prices in the biggest downturn since the aftermath of the Balkan wars of the 1990s.

"I must admit I am worried. This is the worst crisis year," Montenegrin Prime Minister Milo Djukanovic told Reuters. "It is hard to believe that any industry, including the tourist industry, can do business with the same intensity."

A few months ago, leaders in the Balkans forecast they would escape the worst of the world recession.

Now, many say they are next in line after the US and the rest of Europe and a poor summer tourism season could deliver a severe blow to Montenegro and Croatia, which briefly fought during Yugoslavia's violent demise in the 1990s.

Both rely more on tourism revenue as a percentage of their gross domestic product than any other European countries, accounting for about a quarter of their economies, according to the World Travel and Tourism Council. Both economies are likely to be in recession this year.

Lower revenue could delay or reduce billions of euro in expected leisure investment for years to come and have a serious effect on the balance of payments, while making foreign loans from institutions such as the International Monetary Fund and commercial banks all the more pressing. Since opening in 2006, the upmarket 322-room Hotel Splendid outside Budva, Montenegro's main coastal city, has lured the rich and famous, including Madonna and the Rolling Stones.

Now, co-owner Zarko Radulovic is cutting room rates by 30 per cent and offering bargains such as round-trip flights from Serbia's capital Belgrade and two nights' stay for €240.

His Montenegro Stars Hotel Group expects to make no profit this year, but Mr Radulovic, who is president of the Montenegrin Hotel Association, is concerned that next year could be even worse.

"I hope 2011, 2012 will be better," he said.

In the walled mediaeval city of Dubrovnik, Croatia's leading hotel firm Valamar, which operates 39 properties, says it is on schedule to open a €35-million, 401-room hotel by next month.

"In some of our properties we expect a demand decrease and we are compensating it with a large variety of creative packages," said board member Zrinko Kamber.