Stephen III invaded Dalmatia, although he had pledged to Vitale II Michiel, Doge of Venice, that he would withdraw from the Dalmatian towns. Upon Stephen's arrival the citizens of Zadar expelled the Venetian governor and accepted his suzerainty. He again stormed into Sirmium and laid siege to his uncle in Zimony in spring 1165. Byzantine Emperor Manuel decided to make a counterattack, but a rebellion by his cousin Andronikos Komnenos prevented him from marching to the Danube. Nevertheless, Manuel I sent envoys to the monarchs who had earlier supported Stephen III, persuading them to remain neutral in the conflict. Stephen III's uncle died of poisoning during the siege of Zimony, on 11 April. The fortress soon fell to Stephen III.

The Byzantine counter-offensive started at the end of June. An army under the command of Emperor Manuel I laid siege to Zimony and recaptured it; another Byzantine force invaded and occupied Bosnia and Dalmatia. The Venetian fleet intervened on the Byzantines' side in Dalmatia, forcing Zadar to again accept the rule of the Doge. Stephen III could only conclude a new peace treaty with Emperor Manuel after he renounced Sirmium and Dalmatia.