France and Germany have reached a "comprehensive" agreement on new fiscal rules for the beleaguered eurozone, as a package of measures designed to save the single currency begins to take shape.

The proposals, which include a commitment not to force private sector bondholders to take losses on any future eurozone bail-outs, were announced by Angela Merkel, German chancellor, and Nicolas Sarkozy, French president, in Paris on Monday. Together with tough budgetary measures drawn up by Mario Monti's new Italian government, they will form part of the "fiscal compact" demanded by the European Central Bank to enforce budgetary discipline in the single currency region.

Mario Draghi, ECB president, has hinted that such a compact could be followed by aggressive action by the central bank to stop the recent crippling flight from eurozone sovereign debt.

The Franco-German agreement was welcomed by financial markets. Italy's benchmark 10-year borrowing costs fell below 6 per cent for the first time since October, while Spain's came close to 5 per cent in a day of huge drops in their rates.

"If we go into Friday with this kind of momentum and an ECB ready to intervene more, there is a reason why markets have become optimistic," said John Velis at Russell Investments, a US fund manager. Others expressed caution. "It is all about confidence," said Paul Griffiths of Aberdeen Asset Management. "A week is a long time in the European bond markets."

Financial markets later came under pressure after the Financial Times reported Standard & Poor's plans to put all 17 eurozone members on review for a downgrade. While the news came after European markets had closed, the euro tumbled as much as 0.5 per cent against the US dollar. The S&P 500, which had been up as much as 1.8 per cent on the day, pared its advance to about 1 per cent.

Paris and Berlin issued a joint statement on the S&P review, saying that they reaffirmed their proposals to reinforce fiscal governance in the eurozone.

"France and Germany, in full solidarity, confirm their determination to take all the necessary measures, in liaison with their partners and the European institutions to ensure the stability of the euro area," the statement said.

Speaking earlier, Mr Sarkozy said the fiscal measures were intended to form the basis for an agreement on fiscal governance at a European Union summit on Friday in Brussels. Approval will be sought by March from either all 27 EU members or just the 17 eurozone nations.

"Our preference is for a treaty with all 27 so that no one feels left out, but we are ready to move ahead with a treaty with 17 that others are free to join," the French president said, adding, "We have to move as quickly as possible."

In an apparent concession, Ms Merkel agreed that private sector bondholders would not be asked to bear some of the losses in any future sovereign debt restructuring, as she had insisted this year in the case of Greece's second bail-out. However, future eurozone bonds will still include collective action clauses providing for potential voluntary rescheduling of private debt.

Ms Merkel said it was imperative to show that Europe was a "safe place to invest".

Mr Sarkozy, in turn, agreed to Ms Merkel's demand for a revision of the full EU governing treaty to enshrine an enhanced fiscal disciplinary regime. Ms Merkel, however, watered down her demand that the European Court of Justice adjudicate breaches of fiscal rules.

Separately, the head of the European Banking Authority criticised the European Council for "major shortcomings" as evidence mounts of a deepening credit crunch across the continent. Andrea Enria attacked EU leaders' failure to endorse a plan for pan-European guarantees of eurozone bank bond issues.

By Hugh Carnegy and Richard Milne
Financial Times

Additional reporting by Robin Wigglesworth and Patrick Jenkins in London