The agreement was reached by representatives of EU states and the European Parliament late on Wednesday and is expected to be formally approved by both sides later this month.
It paves the way for a new regime to control credit rating agencies, giving powers to a new European policing agency which may be beefed up as Brussels prepares to further tighten controls on raters next year.
Europe's politicians, nervous that further downgrades could knock unsteady markets, have been openly critical of the credit raters.
In October, executives including Moody's chief Michel Madelain and S&P's President Deven Sharma were summoned for a grilling before finance ministers.
The European Commission has told the agencies to watch their step when judging a country's financial health, saying it will probe their work, and the Belgian Finance Minister even called for fines if rating agencies make the wrong call.
Under the deal, Brussels' lawmakers dropped plans for now to force rating agencies to share information with rivals on a protected website in the hope that this could spawn fresh competition. EU states opposed the plans.
Under the new rules, ratings agencies will be required to register with the European watchdog to be set up early next year.
As well as getting the power to levy multi-million euro fines, the European Securities and Markets Authority will also have the muscle to launch raids on an agency's premises and levy a fine equivalent to 20 per cent of an agency's turnover.
The EU watchdog will not be able to question a downgrade, but could object to the way it was arrived at, by challenging whether or not analysts considered all relevant factors.
Although the new body, which is controlled by EU country supervisors, may resist pressure from European capitals, the ratings industry fears political interference as it prepares applications for registration to work in Europe.
Michel Barnier, Europe's top official in charge of financial reform, is also considering the creation of an EU rating agency to challenge the dominance of S&P, Moody's Corp. and Fitch Ratings.
S&P and Moody's are based in the United States.
Fitch, though owned by Fimalac of France, is perceived by some to have strong U.S. links, with its chief executive based in New York.
Just as Washington has done, Barnier wants to dismantle rules that use credit ratings to determine how much regulatory capital a bank needs to set aside to cover lending risks.
Independent experts have derided his attempts to control the sector or "break the thermometer" as misguided.