Greece is on the verge of a breakthrough in talks with its creditors that could wipe out up to 70% of its debts and alleviate the crisis in the eurozone.
An outline deal, hurriedly endorsed by Brussels, came after a frantic three days of negotiations that at one time appeared to be heading for deadlock.
It appeared that Greece had secured a deal to pay an interest rate of 3.1%, rising to 4.75%, on new 30-year bonds created from its outstanding €360bn (£300bn) debt burden. The effect would be for creditors to accept writedowns of up to 70% on many of their loans.
Sources close to the Greek government said it was still possible that major lenders could walk away if there was a failure to get agreement on some of the fine detail, but Athens was confident that further talks over the weekend would bring a comprehensive deal.
Before the news, trading on world stock markets was subdued, indicating the importance attached to a Greek deal as investors waited for the outcome before committing funds. The FTSE 100 finished the day down 12 points at 5728.55, closing before speculation surfaced that a Greek deal was imminent. The French CAC and the German Dax were also down 7 and 11 points respectively. The Dow Jones followed a more positive path closing up 96.5 points at 12720.48.
Greece has become the focus of tension in the eurozone for the third time in as many years after first announcing it was in trouble in the spring of 2010.
It was bailed out along with Ireland and Portugal, then in May last year it became clear that the €110bn Athens had received would be insufficient to finance its growing debts and that a second bailout was necessary.
German resistance to giving any more financial support without a sacrifice by creditors of at least 50% of their loans has held up attempts by Brussels to co-ordinate a second bailout.
Greece's finance minister, Evangelos Venizelos, has spent the last two weeks locked in discussions with a team representing the banks, insurers and hedge funds that hold Greek debt. It is understood a framework deal is in place outlining the basic structure of a bond swap that Venizelos wants to present at the eurogroup meeting of finance ministers in Brussels on Monday.
He needs a deal in place, and approval for a second bailout plan, before a €14.5bn loan refinancing in March.
"The atmosphere of the talks is good, they are continuing today and we hope they will be concluded very soon," a government spokesman said. "This is very important for the sustainability of the national debt and our ability to handle the debt."
European Union ministers will be meeting in Brussels to reach agreement on a new pact enforcing stricter budget controls in the eurozone that could allow the single currency area's highest court to fine countries that fail to adopt key rules.
The European Central Bank wrecked an earlier draft of the agreement after warning that the enforcement powers it proposed were weak and would fail to keep errant countries in line.
Under the guidance of Germany's chancellor, Angela Merkel, Brussels has drafted a tighter pact that would allow the courts to punish a country that refuses to implement a balanced budget rule in its national law with a penalty of up to 0.1% of GDP.
Every EU country except Britain is expected to sign off on the pact when leaders meet at a summit on 30 January.
The debt talks in Greece were expected to continue into Friday evening to thrash out the fine print of the deal. Even if a decisive agreement were to be reached, the proposals will have to be put to the technocrats and they would be likely to change it again.
But the prospect of a deal seemed to encourage investors to move away from safe havens in favour of riskier assets for the first time in several months.
US bond prices slipped and German bonds followed suit, both on hopes for a deal and on more upbeat news from the US housing market.
Kevin Flanagan, chief fixed-income strategist at Morgan Stanley Smith Barney, said the drop in demand for US bonds, and therefore decrease in the price, "seems due to a combination of developments beginning with yesterday's US jobless claims figures (which showed a sharp drop in the newly jobless) and reports that the Greek negotiations with private sector investors may yield results after all."
Benchmark 10-year bond yields rose to 2.01% from 1.97% late on Thursday. The rise in the yield, which follows a decline in the price, were in line with a decline in German bunds, another safe-haven asset.
"Europe is calmer. Their auctions have gone OK, and the euro has responded," said David Ader, head government bond strategist at CRT Capital Group. But he added that the "myopic focus" on rumours about Greece underscored the market's general lack of confidence.
Earlier, France's president Nicolas Sarkozy, warned that Europe remained at risk and urged Greece's political leaders not to delay important decisions to stabilise their debt-ridden economy.
"The eurozone remains in danger. The whole of Greece's political class must understand that it cannot put off decisions needed to resolve the country's crisis," he told a meeting with ambassadors.