ECB chief Mario Draghi set out the plan as German Chancellor Angela Merkel and Spanish counterpart Mariano Rajoy met in Madrid to dispel fears about a possible break-up of the single currency.
But he also insisted governments need to do their bit to save the euro.
Draghi’s masterplan is designed to bring down the soaring borrowing costs that crisis-wracked countries say prevent them from getting back on their feet.
He appeared to have convinced investors the scheme could work, as stock markets across Europe jumped higher and Spanish and Italian borrowing costs tumbled on the news.
In one of the most highly anticipated meetings in ECB history, the bank left its key interest rates at their current all-time lows, as most had expected.
Its main interest rate was left unchanged at 0.75 percent and the ECB also downgraded its growth forecasts for the 17-nation bloc.
But the focus of markets’ attention was on Draghi’s new revamped programme to buy bonds issued by heavily indebted eurozone countries — a scheme named “Outright Monetary Transactions.”
The OMTs will replace the ECB’s previous Securities Market Programme or SMP, first launched in May 2010.
The SMP has come under heavy fire, particularly in Germany. Its critics say it blurs the lines between monetary policy, which is supposed to be free from all political influence in the euro area, and fiscal policy.
The head of the German central bank or Bundesbank, Jens Weidmann, kept up his criticism on Thursday.
In a statement, he hit out at the OMT programme, saying he “regards such purchases as being tantamount to financing governments by printing banknotes. Monetary policy risks being subjugated to fiscal policy.”
Draghi told reporters there was one “no” vote to the OMT programme on the 23-member governing council, saying: “I will leave you to guess who that was.”
But he insisted the new programme did not overstep the ECB’s mandate.
The OMTs “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro,” Draghi said.
“We will do whatever it takes” to keep the eurozone together, Draghi said.
Unlike its forerunner the SMP, the OMT will be subject to strict conditions and the ECB was not offering crisis-hit countries a blank cheque, he said.
Countries wishing to benefit from the OMTs would first have to apply for a bailout from one of the eurozone’s two rescue funds, he said.
And any such cash from those funds is conditional on governments meeting agreed reform targets.
The ECB would also only buy bonds with maturities of up to three years, but there was no limit set on the volume of bonds to be purchased, Draghi said.
Italy one of those countries seen as a likely beneficiary of the new scheme, welcomed the move.
“Today I have seen an important step forward… which goes towards a more satisfactory governance of the eurozone,” Italian Prime Minister Mario Monti said, adding Italy was trying to avoid seeking help.
Spain is seen as another possible candidate for help. But Spanish Mario Rajoy, whose country faces 30 billion euros in debt repayments in October, brushed aside questions as to he would seek a bailout and ECB help.
He did however pledge to “do what it takes to definitively resolve the euro crisis.”
Analysts also welcomed the OMT scheme.
“Draghi has delivered,” said Berenberg Bank chief economist Holger Schmieding.
“After one year in which the ECB allowed turmoil in sovereign bond markets to obstruct the transmission of its monetary policy, the ECB is now addressing the core issue in the eurozone crisis,” he said.
The ECB has signalled “more clearly and in much more detail than before that it will not let any solvent euro member go bust,” Schmieding said.
ING Belgium economist Carsten Brzeski said: “All in all, the ECB has presented a big new bazooka which should help buying time.
“This is probably the furthest the ECB can go to help governments. The ball is now back with eurozone governments.”
But most early press reaction from Germany was more hostile.
“Pandora’s Box had been definitively opened to the profit of countries riddled with debt,” wrote the Munich-based conservative daily Muenchener Merkur.
The right-wing national daily Die Welt lamented: “The markets are celebrating, but for Germany, the nightmare begins.”
The paper raised the prospect of rising inflation and even the demise of the Bundesbank.
And business daily Frankfurter Allgemeine Zeitung lamented that the ECB was breaking the ban on financing the debt on member states.