Germany's high court on has rejected calls to block Europe's permanent rescue fund, paving the way in a much-anticipated ruling for its ratification by the country's president.

Investors breathed a sigh of relief that Germany's highest court was not putting up a roadblock in a central part of Europe's efforts to contain its near three-year debt crisis.

Stocks across Europe rallied strongly, the euro spiked to a four-month high of $1.2897 US and the borrowing rates of troubled economies, such as Spain and Italy, eased further too.

Opponents had challenged Germany's ratification of the European Stability Mechanism — a new, permanent €500 billion ($638.8 billion) bailout fund for the 17 countries that use the euro — arguing that it violated the country's constitution. They had sought an injunction preventing the country's president from signing the legislation into law.

Germany's ratification of the ESM is key, because the fund cannot work without the country's participation. Germany, as Europe's biggest economy, is the No. 1 contributor to the fund.

The taxpayer-backed fund is crucial to the eurozone's debt crisis resolution efforts because it can loan money to governments that can't borrow otherwise, and markets had been nervously awaiting the ruling.

Federal Constitutional Court Chief Justice Andreas Vosskuhle said the case posed "special challenges" — not just because of the political significance of the ESM, but because the financial and political consequences of a possible delay were "almost impossible to estimate reliably."

But, he said, the court's "examination showed that the law with high probability does not violate the constitution."

Still, he said Germany must get legal guarantees before ratification that the provisions of the ESM can't be interpreted in such a way that Germany's financial liability could be increased without the approval of Berlin.

Germany must also ensure that provisions in the ESM treaty demanding "professional secrecy" from fund employees don't stand in the way of the German parliament being informed in full about fund decisions.

Fund relies on German participation

Germany is liable for about 27 per cent — about €190 billion — to the overall European bailout scheme of €700 billion, which includes the ESM and remaining money from the current temporary fund, the European Financial Stability Facility.

It was not immediately clear when the President Joachim Gauck would be able to sign the measure, which was already approved by parliament.

Chancellor Angela Merkel was due to address legislators later Wednesday.