Italy's sovereign debt rating cut by S&P amid growth fear

S&P cut its rating by one level to A from A+, adding that the outlook for the country was "negative".

The international credit rating agency cited fears over Italy's ability to cut state spending and bring its finances in order, particularly given the country's growth prospects.

The downgrade comes in the wake of an austerity budget which Italy passed to cut spending and address its mounting debt issues.

"We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve," S&P said in a statement.

"Furthermore, what we view as the Italian government's tentative policy response to recent market pressures suggests continuing future political uncertainty about the means of addressing Italy's economic challenges."

Italy follows fellow eurozone countries Spain, the Republic of Ireland, Greece, Portugal and Cyprus in having its credit rating downgraded this year.

Malta too had its credit rating downgraded by Moody’s auditing agency from AAA to AA.

The surprise move by the ratings agency will fuel fears of contagion in the Euro zone.

Italy has Europe's second-largest debt level and the cost of that debt has been rising in recent weeks as lenders to Italy have become nervous about its ability to repay loans.

The downgrade is likely to raise Italy's borrowing costs further.

"Coming at a time when the world's financial markets are on edge, warily watching for a default by Greece with knock-on unknown effects on the financial system, the optics of this downgrade stink," said Carl Weinberg of High Frequency Economics.

"Perceptions are more important than realities," he added.

"Investors will be shaken, as if they are not shaken enough already, by what appears to be decaying conditions for another sovereign issuer."

The downgrade has shaken already nervous investors.

In early Asian trading, the euro fell sharply against both the dollar and the yen, while the wider share markets also moved into the red.

Concern over Greece and whether or not it will default on its loans hit markets hard on Monday.

The Greek government is in talks with the International Monetary Fund and the European Union about getting more bailout money released.

Earlier this month, S&P cut the credit rating of the US from AAA to AA+ for the first time in its history.