Germany kept alive hopes that the 17-nation euro currency can survive the sprawling debt crisis when lawmakers in Europe's largest economy voted overwhelmingly on Thursday in favor of expanding the powers of the eurozone's bailout fund.

The vote strengthened Chancellor Angela Merkel's center-right coalition, which had struggled to win support from a bloc of rebellious members, and could bolster her ability to negotiate new European crisis measures.

German Chancellor Angela Merkel has said approving the beefed-up bailout fund was "of the very, very greatest significance." (Tobias Schwarz/Reuters)

While many investors and experts believe new steps will be required in Europe, such as letting Greece write off more of its debt pile, Germany's approval of the fund's new powers and scope was necessary to avoid a new bout of massive market turmoil.

"The support of the Bundestag is an important step for stabilizing the eurozone," Michael Kemmer, head of Germany's Bank Federation, told the news agency dapd. "With that, they have set a course that leads out of the debt crisis."

The €440 billion ($600 billion US) fund will be able to buy government bonds and lend money to banks and governments before they are in a full-blown crisis, making Europe's response to market jitters more rapid and pre-emptive.

Germany, which pays the lion's share of European bailouts, became the 13th member of the eurozone to support the expansion of the rescue fund, the so-called European Financial Stability Facility, or EFSF. Cyprus also passed the proposed expansion on Thursday.

More countries yet to vote

Austria's parliament is widely expected to pass the measure on Friday, the same day Germany's upper house of parliament is set to finalize Thursday's vote, while the Netherlands is expected to approve it in the first week of October.

The biggest remaining hurdle is the final country to vote —Slovakia — where the government will not have enough support to pass it if the leader of the junior coalition Freedom and Solidarity party follows through with threats to vote against the fund's expansion. Its parliament is to vote later in October.

In Berlin, 523 lawmakers in parliament, the Bundestag, voted in favor of expanding German participation to guarantee loans of up to €211 billion, compared with €123 billion so far. Eighty-five voted against it and three abstained.

"It was a strong statement of Angela Merkel's position. She has the backing and the support of the coalition and she is able to negotiate on the European level," Peter Altmeier, the parliamentary whip for Merkel's Christian Democrats, said after the tally was announced.

Markets appeared calmer even before Thursday's votes, following weeks of turbulence triggered by uncertainty over Germany's position on the fund. The euro also traded slightly higher.

"The overwhelming majority in the Bundestag is a good sign and will hopefully mark a step change in German commitment to bringing the spiraling crisis under control," said Sony Kapoor of the Re-Define economic policy think tank.

The lingering problem, however, is that investors are resigned to the fact that Greece will have to default — that is, impose tougher losses on its bondholders.

French President Nicolas Sarkozy will meet with Greek Prime Minister George Papandreou in Paris on Friday to discuss the debt crisis, the president's office said.

Papandreou met Germany's Merkel for similar talks Tuesday. Germany and France combined represent about half of the 17-nation eurozone's economic output.

The bailout fund expansion has to be ratified by all 17 eurozone nations to take force. (Paul Hanna/Reuters)

Greece was saved from default by an initial €110 billion ($150 billion) bailout in May last year before the EFSF was established to help any other countries in trouble. A planned second rescue package for Greece this year includes a voluntary participation by private bondholders, who agreed to write off about 20 percent on their Greek debt holdings.

Many experts say those writedowns should be closer to 50 per cent. The debate among European leaders now is whether to allow such a move under controlled conditions, providing help to banks that may take heavy losses on Greek bonds they hold.

Germany and the Netherlands are open to the option, with Merkel suggesting this week that Greece's second bailout deal might have to be renegotiated. France and the European Central Bank, however, oppose the idea.

Inspectors return

Greece's international debt inspectors returned to Athens on Thursday to complete a review. Merkel has said that any new decisions would depend upon the results of the inspectors' report, which is not due for days.

Forging consensus over new measures — particularly something as delicate as imposing more severe losses on Greece's creditors — will likely be very difficult, however.

Indeed, the parliamentary debate on the EFSF in Berlin on Thursday was a feisty three-hour long affair, reflecting how high tensions in Merkel's coalition were running over the idea of providing more backing to the eurozone's weakest members.

Frank Schaeffler, a dissenter from the junior coalition partner, argued that bailout measures have worsened Greece's economic situation.

"Despite all arguments, the first bailout did not make the situation for Greece better, but worse," said Schaeffler, a Free Democrat. "Expanding the fund will make the situation even worse."

Schaeffler and others had long expressed their concerns, and opposition leaders had said going in to the vote that if Merkel's coalition had to rely on their votes, it would be a sign that her strife-prone and increasingly unpopular government is finished.

Yet after a night of intense lobbying, Merkel's camp was able to secure a majority of 315 — enough to have passed the measure even without support from the opposition parties.

"This shows the clear determination of the coalition on this issue," Rainer Bruederle, the Free Democrats' parliamentary leader. "We have made an important decision for Europe."

Any future changes to the current fund will also require parliamentary approval and maintaining that determination will be crucial to making swift, effective decisions to combat the crisis.

In addition, the Bundestag will face another major vote early next year on the fund's permanent replacement, the European Stability Mechanism, which is due to take effect in 2013. Schaeffler has already vowed to rally his party to reject the ESM.

Party leaders insist they are not worried by Schaeffler's plans, but many analysts have noted Merkel will have to hold her majority together, or Thursday may have only been the first in a series of nail-biting parliamentary showdowns over shoring up the euro.