The report says the Croatian Constitution guarantees freedom of faith and free expression of faith, and that the government generally respects these rights in practice.
The report, which covers the July 2003-June 2004 period, says there were no changes in relation to the preceding period, and notes that the coalition government which took office in December 2003 has continued to contribute to the free practicing of faith.
Stating that nationality and religion are closely linked in Croatian society, the report says that in the past year international observers and religious leaders noted a general improvement of national and religious relations in the country.
Although there is no official state religion in Croatia, the report says the Catholic Church enjoys close ties with the state which are not shared by other religious communities.
The State Department notes that the legal standing of most major such communities has improved thanks to agreements signed with the government which grant them benefits similar to those enjoyed by the Catholic Church, the largest Church in the country.
The report says representatives of minority religious communities have indicated the general climate for freedom of faith has improved from the period covered by last year's report.
According to the report, Croatia has 85 percent Catholic faithful, six percent are Orthodox, one percent Muslims, less than one percent Jews, four percent are different faiths, and two percent are atheists.
The State Department says the repossession of property which was nationalised or confiscated by the Yugoslav communist regime continues to pose a problem for all religious communities. The Catholic Church has reported it has repossessed only 15-16 percent of such property, while the Serb Orthodox Church 10 percent, the latter claiming that the process hit a standstill last year.
Despite noting an improvement in national and religious relations, the report also notes the continuation of incidents directed against primarily Orthodox priests and consisting also of the desecration and damaging of Orthodox Church buildings. The State Department says, however, that the intensity and number of such incidents is decreasing.
The report goes on to say that the conservative sections of the Catholic Church hierarchy voiced dissatisfaction with the government policy, including the return and reintegration of refugees and cooperation with the war crimes tribunal in The Hague, and concludes that such positions have not benefitted the refugee return and national reconciliation processes.
The State Department also says the Catholic Church strongly influences the government's social policy. The report mentions attempts to prevent shops from working on Sundays and a protest against an HIV/AIDS prevention programme which included the use of condoms. The report concludes that many segments of the civil society saw these initiatives as inappropriate attempts by the Catholic Church to impose conservative values on the society.