Europe has secured a historic agreement to draft a new treaty for deeper economic integration in the euro zone, but Britain, the region's third largest economy, refused to join the other 26 countries in a fiscal union and was isolated.

The outcome of a two-day European Union summit left financial markets uncertain whether and when more decisive action would be taken to stem a debt crisis.

A new treaty could take three months to negotiate and may require risky referendums in countries such as Ireland.

Two ECB sources said the European Central Bank would keep purchases of euro zone government bonds capped for now and take no extra firefighting action. Debt markets were wary.

Twenty-six of the 27 EU leaders agreed to pursue a tougher budget discipline regime with automatic sanctions for deficit sinners in the single currency area, but Britain said it could not accept proposed EU treaty amendments after failing to secure concessions for itself.

'This is a breakthrough to a union of stability,' German Chancellor Angela Merkel said. 'We will use the crisis as a chance for a new beginning.'

After 10 hours of talks that ran into the early hours yesterday, all 17 members of the euro zone and nine of the 10 outsiders resolved to negotiate a new agreement alongside the EU treaty.

Britain's few allies melted away in the Brussels dawn. All the other nine non-euro states said they wanted to take part in the fiscal union process, subject to parliamentary approval.

Prime Minister David Cameron insisted at a news conference that it remained in Britain's interest to stay in the EU and take advantage of its single market.

One senior EU diplomat called Cameron's negotiating tactics 'clumsy'. Among other things, he had sought a veto on a proposed financial transaction tax, which may now be voted through by a majority over the objections of the City of London financial centre.

ECB president Mario Draghi called the EU's decision a step forward for the stricter budget rules he has said are necessary for the euro zone to emerge stronger from the turmoil.

Two ECB sources said the bank's governing council decided on Thursday to keep bond buying limited to around 20 billion euros ($26.8bn) a week and there was no need to review the decision in the light of the summit outcome.

'You will see some further purchases but not the huge bazooka that some people in the markets and the media are awaiting,' one central banker said.

French President Nicolas Sarkozy said the ECB's move to provide unlimited three-year funds to cash-starved European banks would be more effective, by enabling them to continue buying government bonds.

Analysts said the notion that commercial banks could step up their purchases of government bonds looked optimistic given the same banks are being asked to deleverage and recapitalise if necessary.

Merkel said the world would see that Europe had learned from its mistakes and avoided 'lousy compromise'.

Sarkozy sounded elated at having united a big group around the euro zone as the EU's core, long a French objective.

'This is a summit that will go down in history,' he said. 'We would have preferred a reform of the treaties among 27. That wasn't possible given the position of our British friends. And so it will be through an intergovernmental treaty of 17, but open to others.'

One EU diplomat summed up the outcome as: 'Britain seethes, Germany sulks, and France gloats.'

European Council president Herman Van Rompuy, who chaired the summit, said the EU institutions would be fully involved in the new treaty, which would be signed in early March at the latest. The euro zone plus nine may hold a summit without Britain as early as January, diplomats said.

In a meeting billed by some as a last chance to save the euro, the leaders also took several decisions on the permanent bailout fund, the European Stability Mechanism (ESM), which will come into force a year early in July 2012.

The ESM's capacity will be capped at 500bn euros.

It also was agreed that EU countries would provide up to 200bn euros in loans to the International Monetary Fund to help it tackle the crisis.-Reuters