Now, S&P downgrades Italy's credit rating

Late on Monday evening, Standard & Poor's downgraded Italy's credit rating by one notch to A/A-1 from A+/A-1+.

It quoted weakening economic growth prospects for the European nation and higher-than-expected levels of government debt as the reasond behind its move.

The rating, however, is still five steps above junk status.

"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," S&P managing director David T Beers wrote in a research note outlining the credit rating downgrade.

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The Italian parliament recently passed an austerity budget worth more than 50 billion euros, with the government pledging to balance the budget by 2013.

Prime Minister Silvio Berlusconi has attacked Standard & Poor's move as being "influenced by political considerations" and says Italy will shortly approve measures to spur growth.

Italy is the biggest country in the European Union to be hit by a downgrade.

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Italy is the Eurozone's No. 3 economy and has a deficit to gross domestic product ratio of 120 per cent, one of Europe's highest.

Lashing out at S&P, the government said in a statement, "The evaluation by Standard & Poor's appears to have been dictated more by newspaper backchat than by the reality on the ground and it appears to have been polluted by political considerations."

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The downgrade, said S&P, reflects its view of Italy's weakening economic growth prospects and the view that Italy's fragile governing coalition and policy differences within parliament will likely continue to limit the government's ability to respond decisively to the challenging domestic and external macroeconomic environment.

Under its recently updated sovereign ratings criteria, the "political" and "debt" scores were the primary contributors to the downgrade, it said.

The scores relating to the other elements of the methodology -- economic structure, external, and monetary--did not contribute to the downgrade.

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The rating agency further said, more subdued external demand, government austerity measures, and upward pressure on funding costs in both the public and private sectors are likely to result in weaker growth for the Italian economy.

The reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve.

The negative outlook reflects Standard & Poor's view of risks to the Italian government's fiscal targets over 2011-2014, as well as the uncertainties on the timely implementation of growth-enhancing reforms.

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The Indian rupee resumed trading, on Tuesday, lower at 48.15/16 per dollar on the Interbank Foreign Exchange, as against its previous closing level of Rs 47.81/82 per dollar, before tumbling further to Rs 48.25 per dollar, a level last seen on September 25, 2009, as worries over Europe's debt crisis deepened after ratings agency Standard & Poor's cut Italy's rating.

The dollar gained against the euro in the Asian market in early trade after Standard and Poor's downgraded Italy's credit rating.

Dealers said a slide in the euro against the US dollar after ratings agency Standard & Poor's slashed Italy's rating put pressure on the rupee.

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Oil prices were mixed in Asian trade on Tuesday as a downgrade by Standard & Poor's of Italy's sovereign debt rating added to market jitters, analysts said.

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European stocks rose early on Tuesday despite the credit rating downgrade for Italy that heightened tensions surrounding the eurozone debt crisis with Greece struggling to avert a default.