Under pressure to prevent a catastrophic breakup of their single currency, euro zone leaders agreed on Friday to let their rescue fund inject aid directly into stricken banks from next year and intervene on bond markets to support troubled member states.

They also pledged to create a single banking supervisor for euro zone banks based around the European Central Bank in a landmark first step towards a European banking union that could help shore up struggling member Spain.

"It is a first step to break the vicious circle between banks and sovereigns," European Council President Herman Van Rompuy told a final news conference after talks which stretched right through the night.

The deal was widely seen as a political victory for embattled Italian Prime Minister Mario Monti and his Spanish counterpart, Mariano Rajoy, over German Chancellor Angela Merkel, who had brushed aside any need for such emergency measures earlier this week.