Mario Draghi, president of the European Central Bank, has unveiled details of a new bond-buying plan aimed at easing the eurozone’s debt crisis.

He said the scheme would provide a “fully effective backstop” and that the euro was “irreversible”.

The ECB aims to cut the borrowing costs of debt-burdened eurozone members by buying their bonds.

The Spanish government’s implied borrowing costs fell sharply after the announcement.

Mr Draghi said the ECB would engage in outright monetary transactions, or OMTs, to address “severe distortions” in government bond markets based on “unfounded fears”.

He insisted that the ECB was “strictly within our mandate” of maintaining financial stability, but reiterated the need for governments to continue with their deficit reduction plans and labour market reforms.

He added that the ECB’s actions came in response to eurozone economic contraction in 2012, with continued weakness likely to continue into 2013.

The ECB expects the eurozone economy to shrink by 0.4% in 2012 and grow by 0.5% in 2013, with inflation rising to 2.6%.

OMTs will only be carried out in conjunction with European Financial Stability Facility or European Stability Mechanism programmes, he said.

In other words, countries will still have to request a bailout before the OMTs are triggered.

The maturities of the bonds being purchased would be between one and three years and there would be no limits on the size of bond purchases, he added.

The ECB will ask the International Monetary Fund to help it monitor country compliance with its conditions.

Mr Draghi is hoping that ECB intervention in the bond markets will help reduce the borrowing costs of debt-laden countries such as Spain and Italy and lessen the likelihood of them needing to ask for a full sovereign bailout, an eventuality that could bankrupt the eurozone and cause the collapse of the euro.

Spain is already benefiting from investors’ response to the plan.

Earlier in the day, the Spanish government raised 3.5bn euros on the debt markets, selling bonds due to mature in 2014, 2015 and 2016.

The implied cost of borrowing over two years fell from 4.71% to 2.80%; the three-year rate went from 5.09% to 3.68%; and the four-year borrowing cost fell from 5.97% to 4.60%.

On the secondary market, where government bonds already in circulation are traded by banks and other financial institutions, the yield on 10-year bonds fell below 6%. In recent months, yields had topped 7%, the level at which Ireland, Portugal and Greece had been forced to seek international bailouts.

The yield on Italian 10-year bonds also fell.

Investors in European companies also appeared upbeat about the plan. European stock markets closed up.

The FTSE 100 ended 2.1% higher; the German Dax, 2.9%; the French Cac 40 index, 3.1%; and the Spanish IBEX, 4.9% at the close.

Bank shares in particular rose sharply, as they stand to lose billions of euros should any eurozone government default on its debts as a consequence of the crisis.

French banks Credit Agricole and Societe Generale both closed up 8%, while in Germany, Deutsche Bank rose 7% and Commerzbank, 5%. In London, Lloyds banking group rose 7%.

Responding to the plans, Peter Westaway, chief economist for Europe at asset manager Vanguard, said: “This is just the good news that was priced by the markets, and it has now been confirmed.”

However, the euro fell back against the dollar to $1.2571 following its high of $1.265 reached before the ECB announcement.

“There is a long-term question of whether this will be enough to meet the long-term financing needs of Italy, and that probably remains.”

While Mr Draghi was announcing the ECB’s plans, German Chancellor Angela Merkel was meeting Spanish Prime Minister Mariano Rajoy for talks on the eurozone crisis.

In a joint news conference afterwards, Mrs Merkel said: “We have to restore confidence in the euro as a whole, so that the international markets have confidence that member countries will fulfil their commitments.”

Mr Rajoy said: “We want to dispel any doubts on the markets about the continuity of the euro.”

Jens Weidmann, president of Germany’s Bundesbank, remains vigorously opposed to the ECB’s plan, concerned that member states could become hooked on central bank aid and fail to reform their economies sufficiently.

But the majority of the 23 ECB council members support the plan.

And the Organization for Economic Co-operation and Development (OECD) added its support for the ECB bond-buying plan on Thursday, as it warned that the eurozone crisis posed the greatest risk to the global economy.

It is calling for more action from central banks to prevent a break-up of the eurozone.

“Concerns about the possibility of exit from the euro area are pushing up [government bond] yields, which in turn reinforces break-up fears,” the OECD said in its global economic outlook.

“It is crucial to stem these exit fears. This could be achieved by the ECB undertaking bond market intervention to keep spreads within ranges justified by fundamentals.”

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