LONDON: European shares were sharply higher and the single currency surged over 1 per cent on Friday after euro zone leaders agreed a deal to stabilise the region's debt markets and recapitalise its banks, easing the funding strains on Spain and Italy.

The deal caught markets by surprise, sending safe-haven German bonds and the dollar lower, while prices for gold, oil and copper rose by over 1 per cent.

Ten-year Spanish and Italian bond yields fell to 6.44 and 5.84 per cent, respectively.

After an all-night session, the leaders of the 17-nation currency bloc agreed that euro-area rescue funds could be used for sovereign debt purchases without forcing countries to adopt extra austerity measures.

They also agreed that, once a single supervisory body for euro zone banks has been created, the funds could be lent directly to banks for recapitalisation without penalising existing debt holders.

“Definitely some good news for risk markets here, though it is not the 'big bazooka',” said Sean Callow, senior currency strategist at Westpac in Sydney, referring to a lack of a reference to the issuance of common euro bonds.

The euro soared 1.25 per cent to $1.2595 on the deal, having earlier hit a high of $1.2628, some way above its low of $1.2407 touched on Thursday.

The FTSE Eurofirst 300 index of top European shares opened 1.6 per cent higher, helping send MSCI's world equity index up 1.2 per cent to 302.07 points, its biggest daily gain of the week.