France's President Nicolas Sarkozy holds a news conference at the end of a euro zone summit in Brussels, October 27, 2011. Euro zone leaders said on Thursday they had reached agreement on a comprehensive package of measures to tackle the euro zone's sovereign debt crisis. [Photo/Agencies]

BRUSSELS - European leaders clinched a deal Thursday they hope will mark a turning point in their two-year debt crisis, agreeing after a night of tense negotiations to have banks take bigger losses on Greece's debts and to boost the region's weapons against the market turmoil.

After months of dawdling and half-baked solutions, the leaders had been under immense pressure to finalize their plan to prevent the crisis from pushing Europe and much of the developed world back into recession and to protect their currency union from unraveling.

World stock markets surged higher Thursday on the news. Oil prices rose above $92 per barrel while the euro gained strongly - a signal investors were relieved at the outcome of the contentious negotiations.

"We have reached an agreement, which I believe lets us give a credible and ambitious and overall response to the Greek crisis," French President Nicolas Sarkozy told reporters after the meeting ended early Thursday. "Because of the complexity of the issues at stake, it took us a full night. But the results will be a source of huge relief worldwide."

The strategy unveiled after 10 hours of negotiations focused on three key points. These included a significant reduction in Greece's debts, a shoring up of the continent's banks, partially so they could sustain deeper losses on Greek bonds, and a reinforcement of a European bailout fund so it can serve as a euro1 trillion ($1.39 trillion) firewall to prevent larger economies like Italy and Spain from being dragged into the crisis.

After several missed opportunities, hashing out a plan was a success for the 17-nation eurozone, but the strategy's effectiveness will depend on the details, which will have to be finalized in the coming days and weeks.

The most difficult piece of the puzzle proved to be Greece, whose debts the leaders vowed to bring down to 120 percent of its GDP by 2020. Under current conditions, they would have ballooned to 180 percent.

To achieve that massive reduction, private creditors like banks will be asked to accept 50 percent losses on the bonds they hold. The Institute of International Finance, which has been negotiating on behalf of the banks, said it was committed to working out an agreement based on that "haircut," but the challenge now will be to ensure that all private bondholders fall in line.

It said the 50 percent cut equals a contribution of euro100 billion ($139 billion) to a second rescue for Greece, although the eurozone promised to spend some euro30 billion ($42 billion) on guaranteeing the remaining value of the new bonds.

The full program is expected to be finalized by early December and investors are supposed to swap their bonds in January, at which point Greece is likely to become the first euro country ever to be rated at default on its debt.

"We can claim that a new day has come for Greece, and not only for Greece but also for Europe," said Greek Prime Minister George Papandreou, whose country's troubles touched off the crisis two years ago. "Let's hope the worst is over."

Since May 2010, Greece has been surviving on rescue loans worth euro110 billion ($150 billion) from the 17 countries that use the euro and the International Monetary Fund since it can't afford to borrow money directly from markets.

In July, those creditors agreed to extend another euro109 billion - but that plan was widely panned as insufficient.

Now, in addition to euro30 billion in bond guarantees, the eurozone leaders and IMF said they will give Greece euro100 billion ($139 billion) in new loans.

With the banks being asked to shoulder more of the burden, though, there were concerns they needed more money in their rainy-day funds to cushion their losses. So European leaders have asked them to raise euro106 billion ($148 billion) by June.

The last piece in the complicated plan was to increase the firepower of the continent's bailout fund to ensure that other countries with troubled economies - like Italy and Spain - don't get dragged into the crisis. The third- and fourth-largest economies of the eurozone are too large to be bailed out like the smaller euro nations Greece, Portugal and Ireland have already been.

To that end, the euro440 billion ($610 billion) European Financial Stability Facility will be used to insure part of the potential losses on the debt of wobbly eurozone countries like Italy and Spain, rendering its firepower equivalent to around euro1 trillion ($1.39 trillion).

That should make those countries' bonds more attractive investments and thus lower borrowing costs for their governments.

"These are exceptional measures for exceptional times. Europe must never find itself in this situation again," European Commission President Jose Manuel Barroso said after the meetings.

In addition to acting as a direct insurer of bond issues, the EFSF insurance scheme is also supposed to entice big institutional investors to contribute to a special fund that could be used to buy government bonds but also to help states recapitalize weak banks.

Such outside help may be necessary for Italy and Spain, whose banks were facing some of the biggest capital shortfalls.