Germany's Constitutional Court said on Wednesday the country can ratify the euro zone's new rescue fund and budget pact as long it can guarantee there will be no increase in German financial exposure to the bailout fund without parliament's approval.

Ruling that an injunction against the European Stability Mechanism (ESM) and fiscal compact was largely unfounded, the court said one condition for allowing ratification was that any increase in German liability beyond 190 billion euros must first be approved by the Bundestag lower house of parliament.

It also said ESM decisions must be submitted to both houses of parliament for approval, rejecting a confidentiality clause in the treaty.

MARKET ANALYSTS' COMMENTS

JOERG KRAEMER, COMMERZBANK:

"The ESM can start. The ECB will buy government bonds on a large scale. We will get a liability union which will change the character of the monetary union towards an Italian-style monetary union. It will have parallels with the Italy of the 1970s and 1980s."

ELISABETH AFSETH, FIXED INCOME ANALYST, INVESTEC, LONDON

"It's not a huge surprise. There was some uncertainty about what they would say but I think given that Germany does have an effective veto in the ESM, given their large share, I think the sense that it violates democratic rights is not finding that much support... and so the ruling is as it is.

"It's quite interesting to see that they say that the amount has to be capped though parliament can agree to raise that amount when the very strength of what the ECB has just announced is that it is unlimited."

HENK POTTS, MARKET STRATEGIST AT BARCLAYS WEALTH

"I think it should be seen as a positive step in the long road to solving the eurozone debt crisis. I think markets will be relatively pleased with the announcement, and the conditions put in place, but all in all no real surprise."

"The idea that we were going to get a big boost on the back of a positive response was a little bit optimistic. The best that we could have hoped for is exactly what we've seen, that we've held on to the recent gains."

COLIN MCLEAN, SCOTTISH VALUE MANAGEMENT IN EDINBURGH:

"Markets are looking for more unsterilized QE in Europe and more money printing following this decision and people will be focussing on prime assets like property and equities. We've gently closed down short positions and increased exposure to banks and commodities.

"It has removed what some people had feared would be a roadblock ... and it keeps the euro zone together for some time."

MARKUS HUBER, A SENIOR TRADER AT ETX CAPITAL:

"Not much of a surprise and some profit taking at some point is certainly on the agenda, however long term it is certainly positive for the market as it removes uncertainty and therefore makes the ESM a more effective tool in combating the European financial crisis, especially if the situation concerning Spain is start to get worse again."

ION MARC-VALAHU, FUND MANAGER, CLAIRINVEST, GENEVA:

"The conditionality is a bit more on the negative side. The maximum liability is a bit disappointing. But the risk premia have been compressed over the last two months and equities have benefited and they should continue to benefit from this overall positive outcome."

DAVID THEBAULT, HEAD OF QUANTITATIVE SALES TRADING, AT GLOBAL EQUITIES, PARIS:

"It's a positive outcome, with acceptable conditions, and the market should react positively to it. The euro zone has got over another hurdle, and slowly but surely, the region is getting more stable, less risky.

"The only big issue left now is Spain, but the mechanisms to deal with the country's problems are taking shape."

KEVIN LILLEY, EUROPEAN EQUITIES FUND MANAGER, OLD MUTUAL ASSET MANAGEMENT:

"The market was expecting it to be ratified but with some conditionality, which seems to be the case. The conditionality that I've seen so far doesn't come as a great surprise. … It hasn't shocked the market in a negative sense and therefore it allows the market to move forward."

CONSTITUTIONAL EXPERTS' VIEWS:

GUNNAR BECK, READER IN LAW AT UNIVERSITY OF LONDON:

"The judgment is extremely disappointing from a legal point of view but entirely as expected. I believe political pressure and fear has caused the court to rule this way.

"The court has ruled any further liability...has to be coupled with the express approval of the German Bundestag. We know from the past that approval by the German Bundestag is no obstacle, all the parties are in favour of any financial systems the EU requires...

"Merkel's centre-right coalition is increasing opposition to bailouts so it is conceivable dissent may grow in future but I don't think future bailouts will be blocked for two reasons - firstly, the Greens and the SPD have already indicated they are in favour of full mutualisation of debt and a banking union, a bailout of all European banks, and Merkel therefore always has the option of entering into a grand coalition.

"The second reason is that Germany has now put so much money into the euro rescue that it is like a bank which has one large debtor, we are reaching a point where Germany is locked in, so it is no longer an option.

"This ruling is death knell, Germany is committed to full-scale debt mutualisation."

(Reporting by Berlin and London newsrooms)