The deal on the revamped euro stability pact comes in response to pressure from Germany and France, both of which have overshot the present national deficit limit of 3% of gross domestic product (GDP) every year since 2002.
Berlin and Paris will now be able to spend more public funds in a bid to stimulate their flagging economies.
While making no formal change to the 3% of GDP budget deficit limit, the new and more lenient euro pact will allow countries to run up more debt by creating loopholes.
Close to threshold
The 12 states using the euro can now subtract from their debt calculation most payments for research and development, defence and - crucially for Germany - the huge costs of economically hard-hit formerly communist eastern Germany where state subsidies total 80 billion euros annually.
Persson said move to liberalise
services are too controversial
Budget deficits in excess of 3% will, however, have to be temporary and as close to the threshold as possible.
Meanwhile, leaders made it clear they would scrap a controversial EU plan to liberalise the bloc's key services sector.
Swedish Prime Minister Goran Persson said on Tuesday that the current European Commission proposal to break down national barriers limiting cross-border supply of services would have to be dumped.
"(It) will not fly and we will have to start again," Persson said, adding that the sweeping liberalisation plan for services – which comprise 70% of the EU economy - was "too controversial" to even serve as a foundation for further talks.
"(It) will not fly and we will have to start again"
Swedish Prime Minister
His comments reflect growing alarm over opening up services in the 25-nation bloc which presently fall under mainly national laws in each member state.
The commission proposal calls for provision of services under what has been dubbed "the country of origin principle".
This would allow businesses to offer services anywhere in the EU as long as they comply with regulations in their home country.
France and Germany are again leading the charge to torpedo this due to fears it will lead to a flood of cheap labour from new member states in eastern Europe, putting their own workers out of business.