LONDON/BERLIN (Reuters) - The conservatives and the Social Democrats agreed to seek a loosening of Germany's debt brake to allow higher defence spending, as well as proposing to create a 500 billion euro ($529 billion) infrastructure fund, their leaders said on Tuesday.

"We are aware of the scale of the tasks ahead of us, and we want to take the first necessary steps and decisions," said Friedrich Merz, leader of the CDU/CSU conservatives and likely next German chancellor.

The euro rallied on the news and was last trading at $1.0589, 1% higher on the day, hitting its highest levels in three months. European defence company shares have soared in recent days as momentum to ramp up defence spending across the region gathers pace.

HOLGER SCHMIEDING, CHIEF ECONOMIST, BERENBERG, LONDON:

"I'm positively surprised. Germany and its government are rising to the challenges and the size of the fund is bigger than expected."

"It sends a clear signal that Germany is serious about its defence, it sends a clear signal to Ukraine and at home it sends a clear signal that Germany is serious about infrastructure spending."

"This is an excellent start for the new German government. This strengthens Europe and should underpin euro gains although there are trade risks to consider."

MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS, LONDON:

"Details around the announcement will of course be key. But this an important step to significantly ease German fiscal policy and to start reversing years of underinvestment into the domestic economy and on defence spending."

"Germany, above almost every other European country, has the fiscal headroom to adjust to the new economic and political reality facing its economy, and the markets should welcome the news."

JENS SUEDEKUM, PROFESSOR, DUESSELDORF INSTITUTE FOR COMPETITION ECONOMICS:

"The agreement … is a gamechanger. Exempting defence spending from the debt brake will enable a sustainable build-up of military capabilities, and infrastructure investment via the large special fund comes on par alongside that. What is key now is that a lot of money must actually come down the pipeline and into the right projects.”

SEBASTIAN DULLIEN, RESEARCH DIRECTOR AT THE MACROECONOMIC POLICY INSTITUTE:

"The result of the discussions on the special infrastructure fund and the reform of the debt brake is a real game-changer. If they succeed, the German economy's stagnation could soon be over. Not just because urgently needed investments will come, but also because the mood should shift dramatically."

($1 = 0.9454 euros)

(Reporting by Dhara Ranasinghe in London and Rene Wagner in Berlin; Editing by Elisa Martinuzzi.)