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Coherent signals from distinct directions is a natural characterization of the multipath propagation effect. This paper addresses the problem of coherent/fully correlated source localization using vector sensor arrays. The maximum likelihood (ML) and minimum-variance distortionless response (MVDR) estimators for source direction-of-arrival (DOA) and signal polarization parameters are derived. These estimators require no search over the polarization parameters. In addition, a novel method for "decorrelating" the incident signals is presented. This method is based on the polarization smoothing algorithm (PSA) and enables the use of eigenstructure-based techniques, which assume uncorrelated or partially correlated signals. The method is implemented as a preprocessing stage before applying eigenstructure-based techniques, such as MUSIC. Unlike other existing preprocessing techniques, such as spatial smoothing and forward-backward (FB) averaging, this method is not limited to any specific array geometry. The performance of the proposed PSA preprocessing combined with MUSIC is evaluated and compared to the Crame´r-Rao Bound (CRB) and the ML and MVDR estimators. Simulation results show that the MVDR and PSA-MUSIC asymptotically achieve the CRB for a scenario with two coherent sources with and without an uncorrelated interference source. A sensitivity study of PSA-MUSIC to source polarization was also conducted via simulations.