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Turkish Cypriot leader Mehmet Ali Talat and his Greek Cypriot counterpart Demetris Christofias met at the UN-controlled Nicosia airport in the buffer zone.
"The leaders decided to start full-fledged negotiations on September 3," said Taye-Brook Zerihoun, head of the United Nations mission on the partitioned island, adding that a final settlement would be put to separate referenda in both communities.
"The aim of fully fledged negotiations is to find a mutually acceptable solution to the Cyprus problem, which will safeguard the fundamental and legitimate rights and interests of Greek Cypriots and Turkish Cypriots," he added.
Reunification talks in the island have been deadlocked since 2004, when Greek Cypriots rejected a U.N. reunification blueprint in a referendum, in which Turkish Cypriots approved the so-called Annan plan.
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POSITIVE DEVELOPMENT
The timeframe for conclusion of talks was unclear. Talat, who like Christofias belongs to the political left, faces parliamentary elections in his breakaway state by the end of 2009 and 'presidential' elections in 2010.
They also agreed on a package of measures to establish cooperation on issues of environment, cultural heritage, crisis management and crime fighting.
Measures include steps to prevent wildfires, conserve scarce water and information-sharing on crime.Â
The start of top-level talks would end a five-month preparation period during which groups of experts from both sides tried to narrow the gap between the two communities on a range of issues.  Â
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The election of Christofias had given a new impetus to peace process in
Initial euphoria about the prospects for a settlement has dampened with both sides finding the going sluggish at the committee level over the sensitive issues of property, territory, sovereignty and security.
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DIFFERENCES ON FEDERATION
Publicly, the two leaders have agreed on forging a federal state composed of two "constituent states" guaranteeing the political equality of both communities. But differences remain over what "federation" precisely means for either side.
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Talat's repeated references to two "equal founding states" point to a looser, confederation-type partnership. Underpinning this is a Turkish Cypriot determination never to be dominated by the Greek Cypriots, who outnumber them roughly four to one.
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Christofias favors a more cohesive federal model with a stronger central government to which the two partner states would remain subordinate. This would address a Greek Cypriot fear of a deal potentially unraveling into formal partition.
The two leaders had agreed on a structure with "one sovereignty and one citizenship," a move sparked reactions in Turkey and Turkish Cypriots. Later Talat had detailed the reason why he agreed with this, stressing a structure based on a "two equal founder states, two equal communities."
In anticipation of a fresh settlement drive being launched, Ban has named Australia's former foreign minister Alexander Downer as his special envoy for Cyprus. Downer, 56, is expected to be on island for when a renewed peace initiative is launched in earnest.
ANALYST VIEWS
Analysts, however, stress there are many unresolved issues and keep the expectations low. "There is no reason not to resolve the issue this time. However I am not optimistic," Mehmet Hasguler, a Turkish Cypriot academic, told Hurriyet English.
He said Turkey's status as a guarantor state, the property claims, and the recent turmoil in the domestic policies of Turkey raise as the main obstacles in front of a potential solution.
"Many things are different than they were in 2004. The leadership changes in both communities are positive. Both leaders are more willing to reflect the demands of their communities," Hasguler, who is also the Cyprus expert in the think-tank USAM, added.
Another analyst claimed time pressure will always remain on the process. Nicosia based analyst Hubert Faustmann said the clock was ticking for Cyprus. "There is always going to be time pressure, one would hope to see a conclusion by June 2009, before the EU's progress assessment on Turkey and the two elections in the north," he told Reuters.
Hugh Pope, Istanbul based analyst for the International Crisis Group, said he does not see any insuperable obstacles for reunification of the island, adding it's very important to realise that the mainstream Turkish decision makers are in favour of a fair deal on Cyprus, Reuters reported.