European Union finance ministers bought Spain more time to revive its sickly economy on Tuesday, offering 30 billion euros to save the country's banks and protect Europe from more debt contagion.
Battling against relentless market pressures, the ministers promised to provide the funds this month with 100 billion euros ($123 billion) potentially available in all.
At the same time, they agreed to extend a deadline for Spain to cut its public deficit to the EU's 3.0 percent limit by one year to 2014 "on account of adverse economic circumstances," an EU statement said.
Spanish Economy Minister Luis de Guindos said the "two agreements are very positive," giving the recession-hit nation the time and the money "to thoroughly clear up the banking sector."
The rescue will be finalised at a special eurozone meeting on July 20 because countries such as Germany must first get parliamentary approval for the deal.
But EU officials differed on the timing of a plan, agreed at a June 28-29 summit, to use the eurozone rescue fund to directly recapitalise ailing banks in a bid to break the "vicious circle" of private and government debt.
While the deal sparked a rally in European stock markets, the euro tumbled as traders wondered whether the bank rescue would resolve Spain's massive debt problems.
The single currency dived as low as $1.2245 at 1440 GMT, the lowest level since July 1, 2010.
The return on Spain's benchmark 10-year bond fell below the red line of 7.0 percent while Italy, also in the crosshairs, saw its interest rate drop under 6.0 percent.
Italian and Spanish borrowing costs had surged on Monday on scepticism that the Eurogroup meeting of finance ministers would amount to much.
"The markets have to realise that the money is there, more than they realise," said Luxembourg Finance Minister Luc Frieden.
"We must try that these states get back to their feet and I think that one year more or less, if that can help a state, is not a wrong signal," he added.
Austria's Maria Fekter, a hardliner on aid for eurozone states needing help, noted that the deal for Spain "contains a lot of conditions, items and formalities Spain has to meet ... (Spain) needs time for that."
But De Guindos expressed a different view, insisting that while the deal will require banks to present restructuring plans, it "does not impose macroeconomic conditions" on the Spanish government.
For its part, Finland is asking Spain to provide collateral in return for its share of the rescue package.
Madrid has sought to avoid any deal that would impose the kind of austerity and structural reforms that have been forced onto bailed out Greece, Ireland and Portugal.
A continuous series of meetings and summits have marked the course of the near three-year debt crisis, with EU leaders repeatedly being outflanked by investors sceptical that the politicians really can put their house in order.
A June 28-29 EU summit was hailed as a "breakthrough" after it promised Spain aid for its banks, the setting up a new bank regulator and made it easier for the new permanent ESM eurozone bailout fund to fund struggling members.
After an initial euphoric welcome, however, market sentiment quickly turned negative, putting Spain and Italy back under pressure over doubts that the direct bank recapitalisation plan would come to life soon enough.
De Guindos said Tuesday the plan to channel aid directly to banks through the European Stability Mechanism (ESM) would "take place rapidly" after the setting up of a eurozone-wide banking supervisor.
But German Finance Minister Wolfgang Schaeuble warned that its creation "will take time (because) it is complex, and not easy to achieve."
EU Internal Markets Commissioner Michel Barnier said a proposal would be presented in September with the hope of putting the banking supervisor in place by the end of the year.
The eurozone's debt-fighting strategy faced a legal battle in Germany.
The German Constitutional Court weighed complaints against the 500-billion-euro ESM and the European fiscal pact for greater budgetary discipline.
This has delayed the planned entry into force of the ESM, which Spain hopes will one day act to directly save its banks.