EU leaders hailed a fall in gas prices hours after they endorsed plans for a price cap on the fuel, breaking months of deadlock over how to tackle Europe’s energy crisis.

The main European benchmark index dropped 7 per cent to €115 per megawatt hour in Friday trading, although it held above a four-month low hit earlier this week. Leaders at a summit in Brussels agreed to pursue work on the cap in an effort to reduce high energy costs that have fuelled inflation and threaten a recession.

“Markets have reacted, bringing prices down,” said Estonia’s prime minister Kaja Kallas. “If the prices are high it drives up inflation and is detrimental to the whole economy.”

The proposed cap would “immediately limit episodes of excessive gas prices” but will not be introduced until it has met conditions imposed by sceptical countries such as Germany and the Netherlands, which fear that producers could export gas to countries willing to pay higher prices. Germany’s chancellor Olaf Scholz last night dropped his opposition to the cap, but the price level or size of the market move that would trigger its intervention is still to be agreed.

The EU has rushed to find alternative supplies to Russia after its invasion of Ukraine nearly eight months ago. Gas flows from Russia now account for about 9 per cent of EU supply, down from 40 per cent last year.

Alexander de Croo, Belgium’s prime minister, claimed that the proposals discussed at the summit, which include agreements to jointly purchase gas on an EU-wide basis and tackle market volatility and speculation, were already having an impact.

“Everyone is convinced we need to intervene in the gas market,” he said. “We have seen over the past days these prices have gone down. These prices need to continue to go down.”

Governments have spent tens of billions of euros compensating households and businesses for rising energy bills but leaders agreed that joint EU initiatives were needed to ease the crisis.

De Croo said energy ministers and the European Commission would finalise proposals in “two to three weeks”. Energy ministers meet on Tuesday to begin working out the details of the price cap.

Gas prices in Europe have fallen sharply since the end of August after they spiked to a record €340/MWh as countries scrambled to secure alternative supplies to Russia after it cut off flows.

Gas storage sites across the continent are now above 90 per cent of capacity, while mild autumn weather has reduced heating demand. But prices remain well above the €20-€40/MWh range they largely traded at over the past decade.

Kyriakos Mitsotakis, Greece’s prime minister and a longstanding advocate for a gas price ceiling, welcomed the agreement. He pointed out that the reason behind the recent fall in prices “is because the markets have found that we are serious about our threat to impose, if necessary, some kind of cap on natural gas”.

However, leaders agreed that any cap must ensure security of supply and should not result in cheap energy being exported to countries connected to the EU grid such as the UK.

The gas industry remains highly sceptical of the plan, arguing that the underlying problem remains a lack of supply, and fears that government interference in the market risks damaging investment in alternatives to Russian gas.

“We need the market price to help balance limited supplies with demand,” said one energy industry executive.

European business leaders said, however, that countries must act before more companies go bust.

“Time is running out,” Fredrik Persson, president of BusinessEurope, the employers’ group, told the Financial Times in an interview. “My major concern is that we not only lose European competitiveness but also businesses and jobs as production moves abroad.”

The proposed emergency price cap mechanism would limit surges in prices on the Dutch Title Transfer Facility, the EU’s main gas benchmark, and would also reduce electricity costs which are linked to gas prices. Other proposals included a commitment to joint purchases covering 15 per cent of EU gas consumption in a bid to fill storage for next winter.

With storage facilities close to capacity, the EU is confident that the bloc can get through this winter without resorting to rationing supplies.

But Xavier Bettel, Luxembourg’s prime minister, pointed out that much of the gas in storage is Russian and will not be available next year. “We filled all the tanks with Russian gas. Next winter is coming too.”