BRUSSELS (REUTERS) - Euro zone finance ministers agreed in principle on Friday to extend heavily indebted Greece's financial rescue by four months, averting a potential cash crunch in March that could have forced the country out of the currency area.
The deal, to be ratified once Greece's creditors are satisfied with a list of reforms it will submit next week, ended weeks of uncertainty since the election of a radical leftist-led government in Athens pledged to reverse austerity measures.
"Tonight was a first step in this process of rebuilding trust," Jeroen Dijsselbloem, chairman of the 19-nation Eurogroup, told a news conference.
"We have established common ground again to reach agreement on this statement."
The agreement, clinched after the third ministerial meeting in two weeks of acrimonious public exchanges, offers a breathing space for the new Greek government to try to negotiate longer-term debt relief with its official creditors.
But it also forced radical young Prime Minister Alexis Tsipras into a major political climbdown since he had vowed to scrap the bailout, end cooperation with the so-called "troika" of international lenders and roll back austerity.
"It has been a laborious but eventually a constructive process," International Monetary Fund (IMF) managing director Christine Lagarde said.
A Greek government official said "Greece has turned the page" and won a breathing space to negotiate a new deal.
European Union paymaster Germany, Greece's biggest creditor, had demanded "significant improvements" in reform commitments by Athens before it would accept an extension of euro zone funding.
The accord requires Greece to submit by Monday a letter to the Eurogroup listing all the policy measures it plans to take during the remainder of the bailout period, to ensure they comply with the conditions.
If the European Commission, the European Central Bank and the IMF are satisfied after an initial view, euro zone member states will ratify the extension, where necessary through their parliaments.
Irish Finance Minister Michael Noonan voiced caution about the prospects, telling reporters: "It's an important first step that we hope will lead to a successful second step on Monday night/Tuesday morning, but then of course there's a third step with ratifications in parliament."
With the 240 billion euro EU/IMF bailout programme due to expire in little more than a week, Tsipras had voiced confidence of an agreement despite the objections to the initial request formulated in a letter to Dijsselbloem.
"I feel certain that the Greek letter for a six-month extension of the loan agreement with the conditionalities that accompany it will be accepted," Tsipras said in a statement to Reuters.
Greece's partners insisted on the shorter period and tied further disbursements to a satisfactory review at the end. They also obliged Athens to commit to fully funding any new spending measures and obtaining approval from its lenders.
A report by German magazine Der Spiegel that the European Central Bank was making contingency plans for a possible Greek exit from the currency area if the talks fail, on which the ECB declined comment, highlighted the high stakes.
German Chancellor Angela Merkel, speaking earlier after talks in Paris, said all EU partners wanted to keep Greece in the euro but "there is a need for significant improvements in the substance of what is being discussed so that we can vote on it in the German Bundestag, for example next week."
The complex document was crafted in preliminary talks with Greek Finance Minister Yanis Varoufakis, German Finance Minister Wolfgang Schaeuble, the Eurogroup's Dijsselbloem and the IMF's Lagarde on Friday.
Finance ministers from other euro zone states insisted on more guarantee that Greece will fulfil the bailout's strict conditions on budget discipline and economic reforms to win their agreement. Athens is determined to loosen austerity to revive its economy.
Tsipras had a long telephone call with Merkel on Thursday and has spoken repeatedly to the leaders of France and Italy in the search for a solution that allows his radical government to fulfil election promises and hold its head high.
Greece faced running out of money by end March without new external funds, people familiar with the figures said.
Euro zone officials said Greece's track record and the combative behaviour of its new leaders had undermined their confidence in whether Athens would deliver what it agrees to in talks with the other countries sharing the euro.
That drove ministers to make Greece hand over custody of nearly 11 billion euros in aid earmarked for stabilising its banks to the euro zone's rescue fund.
"We wanted to make sure that the ... money for Greek bank recapitalisation is for that purpose, not for recapitalisation of the government," Dijsselbloem said.
Some pointed comments were directed at Varoufakis, an outspoken Marxist economist and blogger, and his casual style.
"Even hardliners like us have to give the benefit of the doubt to a communist in a Burberry scarf," an official of one hawkish European country joked.
Adding to pressure to reach a deal, Greek savers have withdrawn their money from the banks at an accelerating pace despite government assurances that there is no plan to introduce capital controls to stem the outflows.
Deposit outflows rose to a total of over 1 billion euros in the past two days, some of the highest daily levels seen this year, three senior banking sources told Reuters.
Greeks were nervous before a three-day weekend, given memories of capital controls imposed in Cyprus in 2013 over a long weekend, a senior banker said. Monday is a public holiday.
The euro rose against the dollar after news of the draft accord on Friday and Greek government bond yields fell on optimism for a debt deal.