Euro zone leaders agreed on Thursday to create a joint financial safety net with the IMF to help debt-ridden Greece and to try to restore confidence in their common currency after weeks of wrangling.
Under the accord, Athens would receive coordinated bilateral loans from other countries that use the euro and money from the International Monetary Fund if it faced severe difficulties.
Europe has taken a big step in the face of a big challenge, Greek Prime Minister George Papandreou told reporters after talks in Brussels, declaring himself satisfied.
But the euro fell to a 10-month low against the dollar because investors took the initial view that IMF involvement suggested the 16-country euro zone was unable to handle its problems alone.
The agreement included no numbers, but a senior European Commission source said the support package would be worth 20-22 billion euros ($27-29 billion) if required in an emergency.
French President Nicolas Sarkozy said the euro zone would put up two-thirds of the money, and the IMF the rest.
Tough terms imposed by German Chancellor Angela Merkel mean the mechanism could be activated only under strict conditions and would require the unanimous approval of the euro zone, giving Berlin a veto.
Greek Finance Minister George Papaconstantinou said the deal removed the risk of default by his country, but he and German officials said no aid was being given to Greece now.
We don't view this as a miracle cure. It is an important part of the cure, no more, said EU President Herman Van Rompuy.
Merkel had long resisted offered aid to Greece because of public opposition in Germany and concerns that any deal could face a legal challenge at home.
But shortly before heading to Brussels for an EU summit, she signaled in parliament that she would accept a contingency plan provided the IMF was involved and EU partners agreed to toughen the bloc's budget deficit rules.
A good European is not necessarily one who offers help quickly. A good European is one that respects the European treaties and national rights so that the stability of the euro zone is not damaged, she said.
At Berlin's insistence, euro zone leaders also called for proposals by the end of the year to tighten the bloc's budget discipline rules, which failed to prevent Greece running up huge deficits and public debt.
The differences over Greece have widened divisions in the EU. European Commission President Jose Manuel Barroso, head of the EU executive, said involving the IMF had been the only way to reach a consensus.
We have solved this in the European family, he said. I think this is the right decision at this time to face what is an exceptional problem.
The cost of insuring Greek debt against default fell on news of the agreement, clinched first by the leaders of Germany and France, and the premium investors charge for holding Greek bonds rather than benchmark German bunds narrowed.
But it remained more than double the spread charged on fellow euro zone weaklings Ireland and Portugal, and four times that of Spain.
BANK MOVE HELPS GREECE
The European Central Bank also took a step to support Greece by extending softer rules on collateral so that Athens does not risk a guillotine on its debt at the end of this year.
Under the arrangement, euro zone countries would provide funding for Greece on rigorous conditions recommended by the European Commission and the ECB.
This mechanism, complementing International Monetary Fund financing, has to be considered ultima ratio (last resort), meaning in particular that market financing is insufficient, the agreement said.
Many details are unclear, such as how the Washington-based IMF and the euro zone would work together in a rescue.
Some euro zone states, notably France, and ECB policymakers have previously opposed IMF involvement, saying such a move would underscore the single currency area's inability to solve the deepest crisis in its 11-year existence on its own.
If the IMF or some other body exercises the responsibility in lieu of the Eurogroup or instead of governments, it is evidently very, very bad, ECB President Jean-Claude Trichet told France's Public Senat television in an interview.
Trichet had earlier given Athens some good news, announcing that the central bank would extend looser collateral rules, due to expire at the end of this year, into 2011.
Greece was at risk of having its bonds rejected as collateral for refinancing with the expiry of the relaxed rules, potentially triggering an even deeper liquidity crunch.
Athens is still saddled with borrowing costs more than double those of Germany and must borrow some 16 billion euros between April 20 and May 23 alone to refinance maturing debt.
Greece says a standby aid package from the EU will reassure credit markets and avert the need for it to request aid.
Without a fallback mechanism, EU leaders fear Greece's debt problems could spread to other countries in the euro zone including Portugal, Spain or Italy.