Germany’s lower house of parliament has approved controversial plans to expand the scope and scale of the €440bn euroozone bailout fund.
The new bill increases Germany's guarantees from €123bn to €211bn - the biggest among eurozone states.
The euro gained on the news and added on 0.7pc to $1.3641 following the result of the vote.
523 members voted in favour, 85 against and there were three abstentions.
While the Bundestag was expected to pass the legislation, backed by the opposition Social Democrats and the Green party, the vote is a crucial one for Chancellor Angela Merkel who was struggling to persuade her own ruling coalition to vote in favour.
She could afford no more than 19 of her coalition MPs to rebel to carry the vote in her own right.
In a trial vote earlier this week 11 members of Ms Merkel's party rejected the legislation.
Stock markets were buoyed by the move which could lead to an increase in the fund to trillions through leveraging or borrowing on the back of it.
Germany’s DAX was up 1.8pc just after the US markets opened while France’s CAC and the FTSE also gained although investors are still wary of the lack of detail on how the debt crisis will be solved.
In the US, shares also gained after more positive than expected economic data.
Figures from the US government showed the economy grew by 1.3pc in the second quarter while applications for jobless benefits fell by 37,000 in the week ended September 24, the fewest since April.
Meanwhile, the "Troika" – a delegation from the European Commission, the European Central Bank and the International Monetary Fund – has returned to Athens to decide whether the Greek government has made sufficient progress in sorting out its public finances to justify the release of the latest €8bn tranche of EU/IMF bailout funds.
The return of the Troika has been interpreted as a sign that the funds will be forthcoming, but the group will not make a final decision on whether to release the loans, which Athens needs to avoid national bankruptcy, until next month.
Financial markets have perked up in recent days in response to talk of a grand plan to increase the powers of the stability fund, but investors were rattled yesterday by reports of a division among European policymakers over the scale of the write-downs that should be imposed on Greek creditors.
Eurozone leaders agreed in July that the holders of €340bn of Greek bonds should accept a 21pc"haircut" as part of the agreed second bailout for Greece.
But now some German politicians are reported to be pushing behind the scenes for a larger writedown to be imposed on Greek creditors although Ms Merket hinted that this is a possibility.
It is being resisted by the French government and the ECB, who fear that reopening July's deal would further destabilise financial markets. French and German banks, which hold around €20bn worth of Greek bonds, would be particularly hard hit by a more extensive writedown.
The head of the European Commission, José Manuel Barroso, told the European Parliament yesterday that the EU is facing the "greatest challenge" in its history in the debt crisis, and urged the ECB to recognise its responsibility to prevent the break-up of the eurozone. He said: "We trust that the European Central Bank will do whatever is necessary to ensure the integrity of the euro area and to ensure its financial stability."
The mooted plan involves the ECB lending money to the €440bn eurozone stability fund, extending its firepower by up to four times.
Mr Barrosso also backed a financial transaction tax which he said would raise €55bn a year, arguing that the European financial sector must "make a contribution" in the fight to save the eurozone, and reiterated his support for a eurobond. "Once the euro area is fully equipped with the instruments necessary to ensure both integration and discipline, the issuance of joint debt will be seen as a natural and advantageous step for all," he said.
A hard road ahead: major obstacles still to be overcome
Hurdle 1: Bundestag vote on second Greek bailout
Today's vote is only Part One of the process of securing German parliamentary approval for the eurozone rescue efforts. Next month, German lawmakers will vote on the second Greek bailout, worth €109bn, agreed by European leaders in Brussels in July. Then the Bundestag will vote on establishing a European financial stability mechanism, which will take the place of the present temporary bailout fund. This third vote is not expected before December. A rejection of any of these measures from the eurozone's key economy would give financial markets a seismic shock.
Hurdle 2: The Troika decision on releasing bailout funds
The delegation made up of officials from the European Central Bank, European Commission and International Monetary Fund, will decide next month whether to release €8bn in bailout funds to Athens. If that money is not delivered, Greece will run out of money to pay debtors and default on its loans. That would send financial markets into meltdown. Release of the funds depends on the Greek government meeting commitments to make massive cuts to state spending and push through large tax rises. The Greek Prime Minister, George Papandreou, promised German leaders this week that Greece will "meet all its commitments".
Hurdle 3: Greece votes on austerity budget
On Tuesday, the Greek parliament approved a key new revenue-raising property tax. However, the country's Finance Minister, Evangelos Venizelos, said this week that pivotal elements of the latest government budget plans will not be presented to lawmakers for approval until the end of October. Meanwhile, pressure is growing on Greek politicians from the street. Protesters continue to gather in Athens' Syntagma Square and more public sector strikes are promised by unions. The Socialist government, whose majority consists of just a handful of deputies in the 300-seat Greek assembly, is extremely fragile.
Hurdle 4: Slovakian parliament votes on bailout
The Slovakian government, driven by a hardline Eurosceptic coalition partner, is playing a game of wait and see. It has put back its own parliamentary ballot on the July bailout package until 26 October because it wants to see how other member states vote first, and also whether Greece is fulfiling the stringent conditions which have been imposed upon it. Slovakia has benefited from increased foreign direct investment since joining the currency zone in 2009. Despite this, there is popular resentment at the prospect of putting taxpayers' money on the line to rescue wealthier eurozone nations.
Independent News Service