Eurozone leaders entered a critical summit on Thursday eyeing a deal to reduce Greece's debt mountain, but without excluding a default to save the euro from its worst crisis.
A draft agreement was put on the table for the 17 leaders following an 11th hour deal reached between the eurozone's two powerbrokers, German Chancellor Angela Merkel and French President Nicolas Sarkozy, a European diplomat said.
The leaders dropped the idea of a special tax on banks to help fund a second Greek bailout, the European diplomat said. The draft opens the door to German calls for private sector involvement in the bailout, even at the risk of triggering a default.
"We cannot exclude any possibility and everything should be done to prevent (a default)," Luxembourg Prime Minister Jean-Claude Juncker, head of the Eurogroup of finance ministers, said on arrival.
Juncker insisted that the euro was "not in danger" after weeks of market turbulence fuelled by fears that the Greek debt crisis will spread to Italy and Spain and across the global financial sector.
Merkel and Sarkozy met European Central Bank (ECB) chief Jean-Claude Trichet in Berlin to hammer out a compromise.
Germany, backed by the Netherlands and Finland, had been at odds with the ECB and Paris over Merkel's demands for private investors to shoulder some of the bill for the second Greek rescue.
There are concerns that any change to the terms of outstanding Greek sovereign bonds could prompt rating agencies to declare Athens in default, with potentially dramatic consequences. One concern is that it could trigger the terms of credit default swaps which act as insurance against default.
The European diplomat said the draft deal included a possible voluntary agreement by banks effectively to extend long-term repayments of Greek bonds or to swap bonds around to restructure its debt.
The goal is to reduce a debt load that has reached 350 billion euros ($499 billion dollars).
"A text has been put on the table that would gain the agreement of the partners on virtually all the points," the diplomat told AFP.
"Some of the solutions could be interpreted by the credit ratings agencies as a default of payments."
On the eve of the summit, European Commission president Jose Manuel Barroso warned that "history will judge this generation of leaders harshly" if they fail to find a solution to the crisis.
"It requires a response, otherwise the negative consequences will be felt in all corners of Europe and beyond," Barroso warned on Wednesday.
"Leaders need to come to the table saying what they can do and what they want to do and what they will do. Not what they can't do and won't do."
Nervous financial markets are keenly awaiting the outcome of the summit following several tumultuous days, with debt crisis contagion threatening to engulf Italy and Spain, the eurozone's third and fourth-biggest economies.
Highlighting the global concerns, US President Barack Obama, who faces his own debt impasse with the US Congress, spoke with Merkel by telephone on Tuesday to discuss Europe's crisis.
Merkel had unsettled markets on Tuesday by playing down expectations that the Brussels get-together would result in something "spectacular" to end Europe's problems in one go.
"Today's summit could provide the last chance for eurozone policymakers to get a grip on the region's debt crisis," said the research firm Capital Economics. "Anything other than a very decisive response could see the situation become irretrievable."
The European Union and the IMF provided last year a 110-billion-euro bailout to Greece that has proved insufficient. Since then, Ireland and Portugal received their own multi-billion-euro rescues.
The bosses of major European banks were to attend the summit, the German newspaper Bild reported.