Croatia could wrap up entry talks with the EU next year.
The commission's annualsays Croatia has entered the final stage of accession negotiations. It urges the country to pursue efforts to meet the EU's conditions for joining, particularly its fight against corruption and organised crime.
The Balkan nation of 4.4 million was on track to become the 28th EU country in 2011. But a border dispute with EU member Slovenia stalled talks for more than a year. The negotiations resumed recently after the two countries agreed on a procedure for resolving the dispute.
Since last year's report, three countries - Albania, Montenegro and Iceland - have applied to join the 27-nation EU. Iceland cleared a first hurdle soon after applying, when EU foreign ministers asked the commission to evaluate the North Atlantic island's suitability for membership.
Albania and Montenegro join three other western Balkan nations as potential members: Serbia, Bosnia and Herzegovina and the former Yugoslav republic of Macedonia (FYROM). On the whole the region made progress towards integration with the EU despite the global downturn. But much remains to be done.
The report says that the recent parliamentary elections in Albania and Montenegro measured up to required standards, but both countries still need to strengthen the rule of law. It recommends the EU activate a provisional trade agreement with Serbia and urges Bosnia and Herzegovina speed up key reforms.
Although their bid for membership still faces many hurdles, Serbia, FYROM and Montenegro are expected to gain visa-free travel to the EU in January.
Concerning Turkey, the report says the EU is encouraged by new momentum for political reform. It also praises Turkey for resuming relations with Armenia after a century of hostility and for efforts to end the long conflict with Turkey's Kurdish minority.
Kosovo, a former Serbian province that declared independence in February 2008, is still in an early stage of relations with the EU. A separate document highlights key policy areas for Kosovo to address and ways the EU can help.
At present, only three countries - Croatia, Turkey and FYROM - have been officially accepted as candidates for EU membership.