BRUSSELS – Eurozone leaders on Thursday agreed to a sweeping deal that will grant Greece a massive new bailout – but likely make it the first euro country to default – and radically reshape the currency union’s rescue fund, allowing it to act pre-emptively when crises build up.

The deal resolves a political deadlock between Europe’s top economic authorities over how to save Greece that had investors worried the debt crisis would spin out of control. Faced with the danger of big economies like Italy becoming unstable, the officials sought to outdo expectations at an emergency meeting in Brussels.

The eurozone countries and the International Monetary Fund will give Greece a second bailout worth (euro) 109 billion ($155 billion), on top of the (euro) 110 billion granted a year ago.

Banks and other private investors will contribute some (euro) 50 billion ($71 billion) to the rescue package until 2014 by either rolling over Greek bonds that they hold, swapping them for new ones with lower interest rates or selling the bonds back to Greece at a low price.

“For the first time since the beginning of this crisis, we can say that the politics and the markets are coming together,” said European Commission President Jose Manuel Barroso.

Initial reaction from markets and analysts to Thursday’s deal was cautiously positive. The euro, which had rallied sharply on expectation of the deal, rose further to gain 1.2 percent against the dollar.

The “summit conclusions surprise by their size and range,” Marie Diron, senior economic adviser to the Ernst & Young, said in a note. “The measures imply significant private sector involvement and very large further support from the EU.”

The deal on involving private creditors is widely expected to be considered a “selective default” by the ratings agencies, making Greece the first euro country to ever be in default – if likely only for a short period of time.

Because of that, the eurozone will back up any new Greek bonds issued to the banks with guarantees.

Those guarantees are necessary because Greek banks use Greek government debt as collateral for emergency support from the European Central Bank.