Financial markets climbed away from a potential abyss on Monday after the European Union and International Monetary Fund agreed a bumper rescue package to prevent a sovereign debt crisis spreading.

World stocks rose nearly 3 percent, the euro gained 2 percent on the dollar and corporate and peripheral debt yields narrowed sharply against benchmarks.

Euro zone policymakers surprised probably even the most optimistic observers by presenting a quick and forceful, unprecedented crisis package, ING said in a note.

It does not solve the fundamental fiscal problems but it gives countries now several years.

The package agreed earlier on Monday pledged 500 billion euros ($670 billion) of loans and loan guarantees to any euro zone countries needing funds, plus about 250 billion euros from the IMF.

It was a package on the scale of the $700 billion Troubled Asset Relief Program (TARP) launched by the United States to fend off the financial crisis of 2007-2009.

There were also measures by central banks to address funding strains and a European Central Bank plan to buy the region's government bonds.

A number of European central banks said they had already started.

The moves followed sharp sell offs in riskier assets across the world last week prompted by fears that Greece's struggle to avoid default on its debt would spread to other euro zone economies and potentially elsewhere.

Global stocks as measured by MSCI <.MIWD00000PUS> were up 2.7 percent with its emerging market-only counterpart jumping more than 3 percent.

The pan-European FTSEurofirst 300 <.FTEU3) leapt more than 6 percent, easily recouping Friday's losses. It lost more than 8 percent last week as the debt crisis bubbled.

The EU has taken a decisive action to stamp out the speculative attack against the euro and this should be sufficient to bring some calm into the market, said Klaus Wiener, head of research at Generali Investments.

What has been done is sensible. It has sent a very strong message to the market that the euro will not be allowed to fail.

EURO REBOUNDS

The euro rallied from last week's 14-month low against the dollar.

The currency was up 2.1 percent at $1.3031, having fallen to $1.2510 on trading platform EBS last week.

Mounting short positions on the euro prompted investors to cover their positions, helping the single currency recover.

Some questions remained about the package, however.

It is still unclear where the money for the funds is going to come from, said Valentin Marinov, currency strategist at Societe Generale.

On bond markets, the premiums investors demand to buy peripheral euro zone government bonds rather than German benchmarks fell.

The Greek/German 10-year bond yield spread narrowed sharply and the cost of insuring peripheral economy debt fell.

Liquidity in Greek bonds dried up last week with no trades going through.

There was little sign, meanwhile, that British assets were being driven by anything other than the global sentiment following a weekend of negotiations to try to create a government.

(Additional reporting by Natsuko Waki and Atul Prakash, editing by Mike Peacock)

International Monetary Fund