Moody's cuts Italy and Spain, warns France and UK

The announcement is the first time since the financial crisis began that the UK and the Bank of England's triple-A grade is put in doubt.

British finance minister George Osborne called it a "reality check" for his country to reduce its budget deficit. "This is proof that, in the current global situation, Britain cannot waver from dealing with its debts," he said.

The French government also said it will press ahead with budget-slashing measures.

"The government is determined to press ahead with its actions to boost growth and competitiveness, notably the reform of the financing of welfare, of employment and the reduction of public deficits," finance minister Francois Baroin said in a statement.

Moody's warning comes one month after another US-based agency, Standard & Poor's cut France's triple-A rating.

EU leaders recently pulled forward the creation of a permanent eurozone bail-out fund, the European Stability Mechanism, and agreed a new treaty on fiscal discipline. But Moody's said there is still "uncertainty over the euro area's prospects for institutional reform of its fiscal and economic framework and the resources that will be made available to deal with the crisis."

It added that: "Europe's increasingly weak macroeconomic prospects ... threaten the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness."

The situation leaves a "high potential for further shocks to funding conditions for stressed sovereigns and banks" across Europe.

At the same time, Moody's confirmed the triple-A rating of Germany, Finland, Luxembourg and the Netherlands as well as non-eurozone countries Denmark and Sweden. It also said Estonia, Belgium, Ireland and the eurozone's temporary bail-out fund, the European Financial Stability Facility, should keep their current ratings for now.

Spain got more bad news on Monday when Standard & Poor's and another high-profile agency, Fitch dropped the rating on several of the country's banks, including its four largest lenders.

Santander, the biggest eurozone bank by market capitalisation, saw its grade cut by two notches to A. BBVA, Bankia and CaixaBank were downgraded by one notch.

"The downgrade of Spain indicates a weakening of its ability to support its largest banks," Fitch said in a statement.

According to the Bank of Spain, the country's banking sector is struggling with €176 billion worth of problematic loans, mainly due to a real estate bubble which burst in 2008, coinciding with the start of the financial crisis.

Standard & Poor's said it expects the Spanish banking system's profitability "to remain below its historical average over the medium term as banks continue to operate in an unfavourable economic and financial environment."