The U.S. ratings agency Standard & Poor's downgraded Italy's credit rating Tuesday, casting new doubt on the country's government and its finances while increasing the likelihood that Italy's economic woes may worsen further.

S&P downgrade came at a vulnerable time for Italy, when the country's ongoing problems have sent shudders across Europe, where the value of the euro has slid against other major currencies on speculation that the troubles from the eurozone's third largest economy could spread beyond its borders.

The downgrade recast Italian bonds as rated A, rather than A+: still investment grade but below the level required by many investment funds that represent a steady demand for highly rated bonds.

In its report, S&P said Italy's "growth prospects are weakening and .. [its] fragile governing coalition and policy differences within parliament will continue to limit the government's ability to respond decisively to domestic and external macro-economic challenges."

S&P also said that a "lack of political will" in response to the debt crisis and the likelihood that economic growth will fail to meet even pessimistic estimates this year and next were major factors.

Italy immediately blasted S&P's move as politically motivated, coming at a time when it is struggling to assuage investor fears that the country might be forced to default on its sovereign debt.

In a statement, the Italian government said S&P put more stock in critical newspaper reports than on the government's 54-billion- euro austerity package approved a week ago, plans for further belt tightening in the future, and a vow to balance the country's budget by 2013.

"The evaluation of the ratings agency seems dictated more by behind the scenes reports in local newspapers than by reality, and the conclusions appear to be tainted by political considerations," said the government statement.

S&P responded with a short statement saying only that their ratings were "completely apolitical."

The Milan-based Italian stock exchange was surprisingly buoyant in the wake of the news, closing slightly higher because of good news out of Greece, the country whose debt crisis sparked the latest round of economic problems last year.

But there was little doubt that the downgrade helped reinforce fears that Italy could be the next country to get pulled into Europe's debt crisis.

"The government did its best to recast the downgrade as a political gesture, but there is little doubt that investors believe the substance behind the ratings," Javier Noriega, chief economist with investment bankers Hildebrant and Ferrar told Xinhua.

The worst news may be that S&P said it could further downgrade Italy within 12 to 18 months if the government is not successful in paying down its overall debt to below its current level of 120 percent of the country's gross domestic product, currently the second highest level in the European Union after Greece. If that happens, it could start to cost Italy so much to sell future bonds that it could never be able to climb out of debt.