Turkish Cypriot government under PM Mehmet Ali Talat resigned 20 October after months of political deadlock. Dervis Eroglu of National Unity Party struggled to form new government coalition. UN Security Council voted in favour of sharp cutback in UN peacekeeping force, while extending force's mandate to 15 June 2005.

Turkish and Greek foreign ministers cancelled planned October military exercises on Cyprus. Greek Cyprus and EU continue to disagree over aid package for Turkish north; discussions in EU General Affairs Council postponed. UN recommended cutting peacekeeping force by 30%.

Subdued celebrations in North 20 July for 30th anniversary of Turkish invasion. EU Commission proposed trade and aid package for Turkish Cyprus to reward “yes” vote to UN reunification plan. Decision on package reportedly postponed until September following Greek Cypriot objections. Greek Cypriot government announced series of measures to unilaterally ease trade between North and South and build confidence in security on island.

UN Secretary General Kofi Annan blamed Greek Cypriot president Tassos Papadopolous for failure of peace referendum in internal UN report 2 June, mooting international recognition of Northern Cyprus. Greece, meanwhile, suggested financial assistance to Turkish Cyprus. UN peacekeeping force (UNFICYP) mandate extended further 6 months; status and structure of mission to be reviewed by Annan within 3 months.

U.S. said now recognised northern Cyprus PM Mehmet Ali Talat - not Rauf Denktash - as leader of Turkish Cypriots. Talat had supported UN Secretary General Annan's peace plan for divided island.

Internationally recognised Greek Cypriot south joined EU 1 May. Cyprus remains divided and militarised following Greek Cypriot rejection (75.8%) of UN Secretary General Annan's plan for reunification. Turkish Cypriots voted (64.9%) in favour despite opposition of President Rauf Denktash. His Greek-Cypriot counterpart Tassos Papadopoulos' successful nationalist stance against plan led to international consternation. EU agreed to allow agricultural produce in north to be sent across 'green line' to Greek Cypriot south – and rest of EU - without restrictions or tariffs. EU Enlargement Commissioner Guenter Verheugen pledged economic support for Turkish north.

Turkish and Greek leaders joined Cypriot counterparts and UN Secretary-General Kofi Annan in Switzerland for final negotiations. Turkish Cypriot leader Rauf Denktash refused to attend. With a mandate to fill in gaps after parties failed to agree Annan presented final plan 31 March. Referendums to be held 24 April. Plan calls for loose confederation of 2 states. Revisions include reduction in number of Greek Cypriots allowed to return to northern Cyprus, reduction in size of Turkish Cypriot territory to 29% of Cyprus, allowing some 120,000 Greek Cypriots back to their homes under Greek Cypriot administration, restrictions on property rights for Greek Cypriots in north until region approaches living standards of south, 24 seats for Turkish Cypriots in 48-seat Senate and the continued presence of Turkish troops in Northern Cyprus.

Long awaited talks started 19 February between Turkish and Greek Cypriot leaders Rauf Denktash and Tassos Papadopoulos. Talks focused on previously rejected plan of UN Secretary-General Kofi Annan, which proposes reunification of Cyprus as "The United States of Cyprus" with 2 federal regions, 1 for 650,000 Greek Cypriots, the other for 180,000 Turkish Cypriots. Disagreement exists over return of around half 200,000 Greek Cypriot refugees to Turkish Cypriot north. Denktash said number too high, Greek side insisted all refugees should have right to go back to their homes. U.S., UN, EU strongly back talks - U.S. promised to donate ‘generously’ if accord is reached. If no agreement by 22 March Turkish and Greek leaders will join negotiations. Should deadlock remain Annan will have authority to resolve outstanding issues before deal put to all Cypriots in 21 April referendum.

Prospects for reunification improved as new coalition government formed in Turkish Cyprus. Pro- reunification Republican party leader and new prime minister Mehmet Ali Talat joined by Democrat Party’s Serdar Denktash, son of President Rauf Denktash. 1 May set by new government as date to find solution based on previously rejected UN plan. EU leaders pushed Turkey to encourage resolution of Cyprus issue in light of its bid for EU membership. Turkish PM Erdogan met UN Secretary General Kofi Annan 24 January and asked for renewed efforts by UN to find solution. Annan conditioned talks on both sides agreeing to UN blueprint as basis for negotiations and referendum on results. Sec. State Powell indicated willingness of U.S. to help sides reach Agreement.

15 December parliamentary elections in Turkish Cyprus, widely viewed as referendum on UN reunification plan, resulted in stalemate. President Rauf Denktash’s nationalist coalition, who oppose UN plan endorsed by Greece, Turkey and Greek Cypriot government, won same number of seats as opposition parties favouring reunification and EU accession; fresh elections to be held in 2 months if parties unable to form coalition government. Denktash appointed leader of pro-European party, Mehmet Ali Talat, as PM of Turkish Cyprus 29 December. U.S. and EU keen to broker reunification before Greek Cypriot part of island joins EU in May 2004.