Europe’s main stock indices fought back strongly on Thursday as markets gave a vote of confidence to eurozone leaders’ “grand plan”.

At close, the FTSE 100 was up 2.98%, the German DAX up 5.35% and the French CAC40 up 6.28%.

The latter two indices have been dragged down by continuing fears over the solvency of the continent’s banking sector, and banks led the recovery as dual measures to cut Greece’s debt by 50% and to pump more than €100bn into recapitalisations buoyed confidence.

The STOXX Europe 600 Banking Index – a composite of bank stocks in Europe – was up 8.92%.

The euro hit a seven-week high of 1.41 against the dollar, with traders forced to unwind bets taken against a deal being reached.

Many traders had been squaring off positions ahead of the summit on Wednesday night, with most having little faith in a comprehensive package, but few willing to go long into such a critical meeting. The plan, while still short on detail, beat their limited expectations.

In a deal thrashed out in the early hours of Thursday morning, eurozone leaders agreed on a 50% write down on Greek debt, an increase in size of the European Financial Stability Facility (EFSF) to more than €1tr (£876bn), a new bailout package for Greece and a recapitalisation of the European banking sector.

“As is often the case following an EU summit, markets are rallying on the back of various agreements and firm commitments,” Julien Seetharamdoo, investment strategist at Coutts, said.

“However, the devil is in the detail, and the euphoria surrounding this agreement reached at 4am may not survive when exposed to the cold light of day over the coming weeks and months.”

Worries that the level of the haircut on private sector holdings of Greek debt is not enough to meaningfully dent the country’s debt mountain, and the continuing lack of confidence in Italy’s government in implementing crucial reforms, are beginning to surface.

Italian and Spanish bond yields - the amount of interest that investors will accept on the sovereign debt - fell, but remain higher than they were in September.

Investors, however, have taken heart from the rare respite and even rarer appearance of coherence and decisiveness from Brussels.

“For now, markets are likely to ignore the lack of detail and focus on the impressive headline numbers such as the commitment to leverage up the EFSF to €1trn…” Seetharamdoo said. “However, substantial risks remain in the medium-term, especially with the euro-zone economy slipping into recession and given substantial political uncertainty. Implementation risk also remains high. What looked good at 4am on a rainy morning in Brussels may be less palatable as the details are more closely scrutinised over time.”