The euro jumped nearly 2% and world stocks climbed on Friday after euro zone leaders agreed on measures to cut soaring borrowing costs in Italy and Spain, in addition to directly recapitalizing regional banks.
Spanish and Italian government bond yields fell sharply, while safe-haven US and German government debt sold off after the region's leaders agreed that European Union bailout funds could be used to stabilize bond markets without forcing countries that comply with EU budget rules to adopt new austerity measures or economic reforms.
EU leaders also agreed after 14 hours of intense talks that creation of a single supervisory body for euro zone banks, housed under the European Central Bank, would be discussed by year-end.
Oil prices rallied, along with other commodities as the moves caught markets by surprise. Investor expectations for meaningful steps to tackle the debt crisis had all but disappeared in the run-up to the two-day EU summit, which ends later on F rid ay.
"We've gotten used to being underwhelmed by the outcomes, so with little to no expectations for success, the fact that it appears we are going to get something substantial is a real important positive for the market in the near term," said Art Hogan, managing director of Lazard Capital Markets in New York.
"It's inching closer to a banking union and the closer we get to a banking union would put (the EU) well on the road to a fiscal union."
The euro surged against the US dollar, climbing as high as USD 1.2692 on Reuters data, the strongest since June 21. It was last at USD 1.2677.
Wall Street stocks opened sharply higher after share prices in Europe jumped more than 2%, spurred by soaring bank shares.
The Dow Jones industrial average was up 220.88 points, or 1.75%, at 12,823.14. The Standard & Poor's 500 Index was up 25.55 points, or 1.92%, at 1,354.59. The Nasdaq Composite Index was up 63.50 points, or 2.23 percent, at 2,912.99.
In Europe, the FTSE Eurofirst 300 index rose 2.7%, with banks up 4%. MSCI's all-country world equity index also gained 2.7% and its emerging markets index climbed 3.3%.
The price of safe-haven German bonds headed lower - briefly pushing yields above their US equivalents for the first time since early February - while prices for gold, oil and copper all rose.
Yields on 10-year German debt rose to 1.607%, up from a close of 1.511%. Their U.S. counterpart, the benchmark 10-year U.S. Treasury note, was down 16/32 in price to yield 1.6381 percent.
Yields on Italian 10-year debt fell to 5.864% from 6.192% the previous night, while yields on the Spanish equivalent fell to 6.478%, down from the close of 6.915% on Thursday.
"EU support for Spain and Italy looks more real today than it has any time the last three years," said Chris Rupkey, managing director and chief financial economist at Bank of Tokyo/Mitsubishi UFJ in New York. "This is not a 'buy some time' fix. It's big."
Despite the market euphoria, some remained skeptical.
Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ in London said among lingering questions is whether the firepower available to the rescue funds will be enough to stabilize the 2.5 trillion euro Spanish and Italian bond markets, and how easy it will be to agree on the banking supervisory mechanism.
"Our initial view is this deal is no game-changer."
Andrew Milligan, head of global strategy at Standard Life Investments, said that bond yields in many European countries are still too high and the growth rates too low.
"We really didn't see any actions by the authorities last night which are going to have a material impact on either of those," Milligan said.
Oil prices rallied, but were still set for the deepest quarterly loss since 2008.
Brent crude for August was up $3.68 to $95.04 a barrel. U.S. crude was up $3.74 a barrel at $81.43 a barrel, up from an eight-month low hit on Thursday.
Copper rose over 4 percent to hit a 1-month high, while gold prices rallied almost 3 percent.
Spot gold prices rose USD 45.11 to USD 1,596.40 an ounce. The Reuters/Jefferies CRB Index, a benchmark of 19 commodities, was up 2.76% at 279.32.
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