A former Serb paramilitary leader wanted in Croatia for war crimes won an appeal against his extradition from Australia on Wednesday, and a court ordered he be freed from prison.

Dragan Vasiljkovic was arrested in January 2006 after Zagreb requested his extradition to face accusations of committing atrocities during the nation's 1991-1995 war of independence from the former Yugoslavia, opposed by rebel Serbs.

Vasiljkovic was deemed eligible for extradition in April 2007, but stalled his removal by mounting a series of legal challenges, arguing he would not receive a fair trial on the charges.

The full bench of Australia's Federal Court ruled the 54-year-old had established a "substantial or real chance of prejudice" if he was sent to Croatia for trial.

"The second ground of appeal is thus made out, that there are substantial grounds for believing that he may be punished or imprisoned... and that such treatment arises by reason of his nationality or political opinions," the court ruled.

"The appeal should thus be allowed."

Zagreb accuses Vasiljkovic of involvement in the torture and killing of Croatian civilians and prisoners of war in the rebel Serb stronghold of Knin in 1991 and the southern village of Bruska in 1993.

He has denied committing war crimes but has admitted in media interviews to training Serbian recruits, killing in combat and interrogating enemy troops.

Vasiljkovic successfully argued that Croatia was seeking to try him, in part, because of his political beliefs about the right to self-determination of Serbs in the Krajina region of the Balkans.

Extradition of a fugitive sought "for or in connection with his race, religion, nationality or political opinions" was not allowed under Australian law, the court said.

The three judges ordered Vasiljkovic be freed from prison, where he has been held since his 2006 arrest, but delayed his release until 3pm on Friday to allow Croatia time to lodge an appeal if they wished.

Vasiljkovic, who was working as a golf instructor in the western city of Perth until shortly before his arrest, had earlier argued unsuccessfully in the High Court that his detention was illegal as Australia had no extradition treaty with Croatia.

AFP

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