Croatia says it will introduce signs in both Latin and Cyrillic scripts to respect Serb rights in the town of Vukovar, which was devastated by Croat-Serb fighting in 1991.
Ethnic Serbs make up 34.8% of Vukovar's population, according to a 2011 census.
Croats use the Latin alphabet, while Serbs mostly use Cyrillic script, but they use a common language.
The government says Vukovar and other areas with large Serb minorities must have municipal signs in both scripts.
Serb nationalists, backed by units of the former Yugoslav army (JNA), fought against Croatian independence in 1991.
Vukovar remains a painful symbol of the war for Croats, because 260 people were murdered there by Serbs after a three-month siege by the Serb-led JNA.
Some groups of Croatian war veterans have criticised the decision on dual-alphabet signs.
But the Croatian Minister for Public Administration, Arsen Bauk, said such signs were necessary under a constitutional law that mandates bilingual signs in towns where a minority accounts for more than 30% of the population.
Yugoslavia recognised both scripts equally, but when the federal state collapsed in the 1990s local nationalists favoured one or the other. Since independence Croatia has officially recognised only the Latin script, while in Serbia both are in official use.
The coastal region of Istria, near Italy, introduced bilingualism in Croatian and Italian several years ago.
Croatia is under close scrutiny by the EU this year ahead of its expected accession to the bloc in July. Human rights legislation is an important part of the EU acquis - the rulebook - that member states are obliged to adopt and enforce.