Global policymakers cobbled together an emergency rescue package worth about $1 trillion to stabilize world financial markets and resolve the Greek debt crisis that threatened to sink the euro and unravel euro-zone unity.
The rescue, hammered out by European Union finance ministers, central bankers and the International Monetary Fund in marathon weekend talks, was the largest in more than two years since G20 leaders threw money at the global economy following the collapse of Lehman Brothers.
The size of the package surprised financial analysts and the euro rose close to 2 percent, while stocks in Asia firmed. Credit default swaps, insurance like instruments to hedge against default, strengthened and European shares were set to rebound from sharp falls on Friday.
The U.S. Federal Reserve reopened currency swap lines with several central banks to try to assure markets of dollar liquidity and the European Central Bank said it would buy government debt to steady investor nerves.
Group of Seven and Group of 20 finance ministers offered their backing of the measures.
By establishing a 750 billion euro fund to bailout Greece and aid other struggling governments, Germany and other strong European states are chasing a dream -- a single European currency and broader European unity -- that may have no place in reality, said Peter Morici, a professor at the University of Maryland.
The emergency measures are worth much more than any previous attempts by the 27-country EU or the 16-state single-currency group to calm markets.
EU Monetary Affairs Commissioner Olli Rehn told a news conference the package proves we shall defend the euro whatever it takes.
They weekend agreement comes after the crisis over debt-laden Greece drove sovereign debt yields and insurance on this debt to record levels, which Sweden's finance minister blamed on the wolfpack behaviors of financial markets.
The ECB is mimicking the Fed's 'kitchen sink' strategy of the past few years, Wrightson ICAP chief economist Lou Crandall said in a note to clients.
Others said the move at least bought Europe some time to calm government bond markets but High Frequency Economics said in a research note the package was still too vague to understand.
Financial markets have punished heavily indebted euro zone members, such as Portugal, Spain and Ireland, threatening to plunge them into Greece's plight, in turn roiling global markets.
The $1 trillion package consists of 440 billion euros in guarantees from euro area states, plus 60 billion euros in a European instrument.
EU finance ministers said the International Monetary Fund was expected to contribute 250 billion euros, taking the total to 750 billion euros, or around $1 trillion.
IMF head Dominique Strauss-Kahn did not offer any specifics but said any IMF action would be on a country-by-country basis.
The ECB said it will buy euro zone government bonds to help support fractured markets, abandoning its resistance to full-scale asset purchases.
It said in a statement the step, dubbed the nuclear option by many economists, was justified because of government promises to meet strict budget targets and step up consolidation efforts.
The euro currency, which last week sank to a 14-month low against the dollar, rose as high as $1.2950 before slipping back on the ECB decision to buy debt. It was changing hands at $1.2915 at 1:20 a.m. ET.
Gold prices, considered a safe haven investment, fell as much as 1.5 percent after touching near record highs last week. Stocks rose across the board -- Japan's Nikkei was up 2 percent -- and U.S. S&P futures jumped 2.7 percent.
Credit default swaps strengthened sharply. The broad Asia ex-Japan iTraxx investment-grade index narrowed 33 basis points from Friday to 110/113, traders said. The index had widened to 150 bps on Friday, the highest since July 2009.
Getting them to agree on a number is crucial, said Tony Morriss, market strategist at ANZ in Sydney. But to me what appears more important is the establishment of swap lines and quantitative easing (QE). And while QE may weigh in the longer term, the euro seems to be stabilizing, at least in the near term, Morriss said.
The ECB said the scope of the purchases was yet to be determined, but added they would be offset by liquidity-absorbing operations so that the stance of monetary policy is unaffected.
The ECB last year announced a 60 billion program to buy covered bonds but this would be its first move into buying government debt.
The central bank swaps facilities are meant to ease fears of a dollar shortage as investors dump riskier assets and move back into the U.S. dollar. The cost of interbank three-month U.S. dollar funds saw its largest rise in 16 months on Friday.
The move is designed to ensure there is enough money and confidence in the global financial system to stave off a 2008-style credit crunch.
Jitters over euro zone finances have set global markets on edge and created the conditions for a drop of nearly 1,000 points in the Dow Jones industrial average on Thursday. Authorities are investigating what triggered the fall.
Both the EU and the IMF have already approved a 100 billion euro package to support Greece, whose budget deficit blew out last year to 13.6 percent of GDP.
To secure the funds, Greece has committed to deep budget cuts that have already caused violent public protests as it moves to get the deficit back down to the EU limit of 3 percent.
Policymakers around the globe are worried the crisis in Greece could spread to other countries, fears compounded by Thursday's unexplained plunge in U.S. stocks.
In Europe, officials said they would fight speculative investors they blame for aggravating the public debt crisis.
Economists estimate that if Portugal, Ireland and Spain eventually come to require bailouts similar to Greece's, the total cost could be some 500 billion euros.
(Additional reporting by Reuters bureaus worldwide; Writing by Paul Tait; Editing by Neil Fullick)