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In the 14th minute, a Croatian free from the 25 yards out was tipped over by Kieron Thorp in the Irish goal.
Ireland should have taken the lead a minute later. After good hold-up play by Ian Daly, he played in Craig Duggan who squared to Conor McCormack, but he struck his shot wide from less than 10 yards out.
The Republic had another opportunity in the 21st minute. Good work down the left wing saw the ball break to Shane O'Connor and his cross was shot over the crossbar by Craig Duggan.
Again neither side managed to grab a firm control of the game in the second half.
After 37 minutes Croatian striker Franjo Tepuric managed to turn and shoot inside the Irish box, but he saw his shot hit the post.
Croatia broke the deadlock a minute later. Ireland failed to get a head to an in-swinging corner from the left and Croatian centre-back, Luka Jagacic, rose highest to head the ball home.
Croatia were now able to sit back and defend their one goal lead, while attempting to hit Ireland on the counter-attack.
The Croatians held on for the win, but with Serbia & Montenegro losing 3-2 to Latvia in the other game in Ireland's section the group is still very open.
Wednesday's fixtures:
Croatia v Latvia, ko 15.30hrs
Serbia & Montenegro v Republic of Ireland, ko 17.00hrs (16.00hrs Irish time)
In Group A, Romania defeated Italy 1-0 while Slovenia beat Go & Go by the same score-line.
Wednesday's fixtures:
Italy v Go & Go, ko 17.00hrs
Slovenia v Romania, ko 17.00hrs
The top two from each group will contest the semi-finals.
Republic of Ireland, U16 team:
Kieron Thorp Charlton Athletic
Mark Nolan Shelbourne
Daniel Langan Belvedere (52min Matthews)
David Joyce Castlebar Celtic
Paul Honohan Wilton United
James O'Brien Cherry Orchard
James Doyle Home Farm (37min Marshall)
Conor McCormack Bellurgan
Ian Daly Home Farm
Craig Duggan Kilreen Celtic
Shane O'Connor Wilton United (37min Collins)
12. Niall McArdle Home Farm
13. Michael Collins Cherry Orchard (37min O'Connor)
14. Dean Marshall Shelbourne (37min Doyle)
15. Kevin Dawson Belvedere
16. Kevin O'Brien Douglas Hall
17. Kurtis Byrne Cherry Orchard
18. Gareth Matthews Cherry Orchard (52min Langan)