Greece and the Eurogroup of finance ministers have reached deal in principle to extend the country's bailout by four months.

The agreement removes the immediate risk of Greece running out of money next month and possibly being forced out of the single currency area.

It provides a breathing space for the new leftist-led Athens government to try to negotiate longer-term debt relief with its official creditors.

"Tonight was a first step in this process of rebuilding trust," Jeroen Dijsselbloem, chairman of the 19-nation Eurogroup, told a news conference. "We have established common ground again to reach agreement on this statement."

Euro zone officials said the deal required Greece to submit a letter to the European authorities by Monday listing all the policy measures it planned to take during the remainder of the bailout period, to ensure they complied with conditions.

“The institutions will provide a first view whether this is sufficiently comprehensive to be a valid starting point for a successful conclusion of the review,” the Eurogroup said in a statement confirming the four month extension. “This list will be further specified and then agreed with the institutions by the end of April.”

If the officials from the European Central Bank, International Monetary Fund and European Commission say the list is acceptable, then another euro zone finance meeting could take place via conference call on Tuesday.

Speaking after the meeting, Greek finance minister Yanis Varoufakis said he had agreed "a mutually beneficial agreement between us and our European partners".

"It took three Eurogroup meetings for Greece and Europe to turn a page...We combined tow things that are usually imagined to be contradictory – logic and ideology in the way that we bargained. We combined respect for the rules and respect for democracy."

However, the deal has forced leftist prime minister Alexis Tsipras into a political climbdown since he had vowed to scrap the bailout, end cooperation with the so-called "troika" of international lenders and roll back austerity.

“It has been a laborious but eventually a constructive process,” International Monetary Fund managing director Christine Lagarde said.

The Eurogroup said the Greek authorities “had expressed their strong commitment to a broader and deeper structural reform process aimed at durably improving growth and employment prospects, ensuring stability and resilience of the financial sector and enhancing social fairness”.

“The authorities commit to implementing long overdue reforms to tackle corruption and tax evasion, and improving the efficiency of the public sector.”

The Greek government welcomed the deal, with one official saying Athens has “turned a page” and now had time to reach a “new deal”.

“We have avoided recessionary measures,” the official added.

Germany, Greece's biggest creditor, had demanded "significant improvements" in reform commitments by Athens before it would accept an extension of euro zone funding.

Officials said an outline deal was reached in preparatory talks involving the Greek and German finance ministers, as well as the managing director of the IMF, Christine Lagarde. It was then agreed by the full 19-member Eurogroup, bringing and end to weeks of uncertainty.

With the €240 billion EU-IMF bailout programme due to expire in little more than a week, the deal means Greece will not run out of funds in the short term.

Taoiseach Enda Kenny on Friday night welcomed the Eurogroup decision. He told the opening session of the Fine Gael national conference in Castlebar that he was sure that Minister for Finance Michael Noonan had contributed to the decision by pointing out how Ireland had succeeded through negotiations in getting a better deal.

Mr Noonan voiced caution about the prospects, telling reporters: “It’s an important first step that we hope will lead to a successful second step on Monday night/Tuesday morning, but then of course there’s a third step with ratifications in parliament.”

The Eurogroup statement said there was an “appreciation for the remarkable adjustment efforts undertaken by Greece and the Greek people over the last years”.

It said the extension would “also bridge the time for discussions on a possible follow-up arrangement between the Eurogroup, the institutions and Greece”.

Additional reporting by Reuters