BELGRADE - Serbia and Italy signed a deal on joint investment on Monday in power production and transmission facilities, pledging to work closely on gas and oil pipeline projects.

This is the best way to respond to the world financial crisis, Petar Skundirc, Serbia's energy minister, said after signing a protocol on cooperation between the two countries.

Joint ventures will be established for various projects in Serbia and it means the beginning of the new investment cycle.

Serbia's power production and transmission facilities fell into disrepair during the 1990s, a decade of sanctions and international isolation. The last power production facility was built 20 years ago.

After late strongman Slobodan Milosevic was ousted in 2000, the European Union provided more than 400 million euros ($505.7 million) to help Serbia's energy sector.

Under Monday's protocol companies from Italy and Serbia will construct hydropower plants, mostly on the river Drina, and consider building wind parks.

Italy is primarily interested in reducing carbon emissions and using the renewable energy resources, Economic Development Minister Claudio Scajola told reporters.

Serbia and Italy pledged to promote the Pan-European Oil Pipeline (PEOP) aimed to bring crude from the Caspian basin via the Romanian Black Sea port of Constanta to Trieste in Italy. Croatia, Romania and Slovenia are also in the project.

Italy has shown considerable interest in energy projects in the Western Balkans across the Adriatic Sea from its eastern coast. Over the past year, Italy has pledged more than two billion euros in various energy projects in Albania alone.

Last year Serbia concluded an energy deal with Russia that was criticised by some members of the ruling coalition for putting the sector in the hands of Russian companies.

That arrangement gave Russia's Gazprom control of a majority stake in Serbia's oil monopoly NIS in exchange for Serbia's inclusion in the South Stream pipeline. (Reporting by Ivana Sekularac; editing by Adam Tanner)