European leaders have agreed a new package of anti-crisis measures at a two-day summit, but were forced to delay increasing their rescue fund and acknowledged they faced new threats from a government collapse in Portugal.
Battling to stem a debt crisis that has pushed Greece and Ireland into bailouts, the EU had promised to unveil a comprehensive solution at the summit that it hoped would reassure markets.
But the abrupt resignation of Portuguese prime minister Jose Sócrates on the eve of the meeting, after his austerity measures were rejected by parliament, cast a long shadow.
Uncertainty in other euro members such as Finland and Ireland also prevented leaders finalising fundamental elements of their plan.
A deal on debt relief for Ireland has been delayed pending the results of bank stress tests due next week.
Taoiseach Enda Kenny said the outcome of the tests would inform the Government's next steps on the bailout interest rate and any moves to impose losses on bond-holders.
He also said Irish banks would have more "credibility" in markets if they had access to a "medium- to long-term funding facility," rather than relying on shorter-term funding from the ECB, which has an estimated exposure to Irish banks of €100 billion.
He said Minister for Finance Michael Noonan has twice travelled to Frankfurt for talks with the ECB, adding that he was hopeful European finance ministers will "make progress" on easing the terms of Ireland's bailout after the capital needs of the banks are clarified.
Mr Kenny said some of the more "extreme" estimates are based on a scenario where banks were forced into a "fire sale" of assets as the ECB seeks to reduce its Irish exposure. "The ECB accepts it would not be prudent to have immediate fire sales."
German chancellor Angela Merkel told reporters at the end of the summit that "the euro has survived a critical test but there is lots of homework to be done," adding that the bloc needed to "atone for past sins".
"This is a comprehensive package which I think is a big step forward. Whether it will be sufficient, only time will tell."
Yields on Portugal's 10-year benchmark bonds pushed above 8 per cent to a new record today, a rate seen as unsustainable for a country which needs to refinance about €4.5 billion of debt in April and a similar amount in June.
Leaders were able to seal a deal on funding for the European Stability Mechanism (ESM) a new, permanent safety net that will become operational from mid-2013.
Ms Merkel backtracked before the summit on a deal that would have forced Germany, Europe's biggest economy and paymaster, to put up €11 billion for the fund in its first year, reducing her wiggle room for tax cuts before the next election.
Under the compromise, capital injections totalling €80 billion for all euro zone members will be spread out over five years rather than three, with smaller instalments.
Euro zone leaders also formally backed the "Euro Plus Pact", a list of areas for expanded economic policy harmonisation which has been renamed three times because of sensitivities in various individual member states.
Six EU states that do not use the single currency - Bulgaria, Denmark, Latvia, Lithuania, Poland and Romania - joined the 17 euro states in backing the pact, in part out of worries they could be excluded from future policy talks.
Britain, Sweden, Czech Republic and Hungary remain out. In other areas the summit fell short of expectations.
Although leaders had agreed in principle earlier this month to boost the lending capacity of their temporary safety net - the European Financial Stability Facility (EFSF) - to €440 billion from roughly €250 billion, they had to push this back until mid-year because of a pending election in Finland.
Concerns are growing that Irish banks could require more capital than the €35 billion set aside for them under last year's EU/IMF bailout.
Portugal is widely expected to be the next euro zone domino to fall after Ireland and Greece.
Mr Sócrates attended the summit despite having submitted his resignation late on Wednesday.
He made clear his continued opposition to asking for a bailout, and said that whatever Portuguese government next comes to power, it would stand by its fiscal commitments.
Portugal's president was consulting with political leaders in Lisbon today to decide whether to call snap elections. If he does, by law they cannot be held before nearly two months have expired.
Any decision on whether to seek a bailout may therefore only be taken in May.
Reflecting the uncertainty, both Standard & Poor's and Fitch cut Portugal's credit rating by two notches.
Should Lisbon opt for a rescue, senior euro zone officials have said it will likely need €60 to €80 billion in assistance from the EU rescue fund and the International Monetary Fund.
With Portugal close to the brink, attention could shift to Spain, which has gradually won back the confidence of investors by unveiling reforms of the labour market and pension system, as well as a plan for shoring up its ailing savings banks.
While the spreads of Portuguese 10-year bond yields over benchmark German bonds have climbed to new highs, those of Spanish bonds have fallen to their lowest level in nearly two months.
Spanish prime minister Jose Luis Rodriguez Zapatero said today he did not fear contagion from Portugal despite the close economic ties between the neighbours. Spanish banks hold roughly a third of Portuguese debt.
But he pledged to take additional measures to strengthen state finances, nonetheless. "In my opinion we are in a position to withstand the political situation in Portugal," Mr Zapatero said.
Agencies
