The agreement comes after a lengthy showdown between the government and the PSD which had threatened to derail the budget and plunge the country into paralysis.

"I think this was a victory for Portugal and for the Portuguese because it was shown that understanding is possible on the essential questions that have a bearing on our future," Eduardo Catroga, the PSD negotiator, told reporters.

"It was very important to tell the country that we could agree."

Brussels, investors and Portugal's large banks have piled pressure on both sides to reach a deal. Failure to do so could have forced the government to seek a financial rescue from its European partners, as Greece did earlier this year.

Prime Minister Jose Socrates has promised to cut the deficit to 4.6 percent of GDP next year from 7.3 percent this year and needs the PSD to vote for the budget or abstain in order to pass it. A first vote in Parliament is scheduled for Wednesday.

Finance Minister Fernando Teixeira dos Santos said he hoped the PSD would now support all necessary measures to ensure that the government's budget goals are met.

The agreement excluded some items from a rise in value-added tax, or sales tax, reducing revenues for the government, Teixeira dos Santos said.

The minister said those lower revenues would still have to be compensated by income from other sources as the budget moves through the commission stage in parliament.

"Through the deal, which reaffirms the necessity of a budget deficit of 4.6 percent, I hope the PSD will fulfill its commitment and that it will support the necessary measures to meet this goal," Teixeira dos Santos said.

Saturday's agreement ensures the budget will get through the first budget vote in Parliament on Nov. 3. The final vote on the bill will only take place at the end of next month.

Fears grew after talks between the government and the PSD collapsed on Wednesday. But on Friday Socrates and PSD leader Pedro Passos Coelho said they were open to new talks, suggesting an agreement was possible after all.

Because the government rules without a majority it needs the support of the opposition to pass legislation.

The PSD has insisted on more spending cuts and smaller increases in taxes to cut the budget deficit, arguing that the Portuguese state sector is bloated and needs deep reforms.

Socrates had threatened to resign if the budget was not passed, which would have created months of uncertainty because, under the constitution, a snap election could only be held in May at the earliest.

The budget agreement means the key measures of raising value-added tax to 23 percent from 21 percent and of cutting civil servant wages next year by 5 percent remain intact.