Italian Prime Minister Mario Monti wasted no time in condemning international ratings agency Moody's when it downgraded the country a couple of notches from A3 to a Baa2 rating on Friday.

The premier described the agency's decision as "a disgrace" and said it had failed to take account of the tough measures a "virtuous" Italy had taken to try and rectify its dismal economic situation.

"Instead of rewarding us, they are punishing us," furious Monti said while attending a conference of business leaders at Sun Valley in the United States.

The Moody's downgrade was probably the last thing the premier needed after former prime minister Silvio Berlusconi this week signalled plans for a political revival and a new run for leadership at the 2013 elections.

But as a storm of protest erupted from Italy's political leaders over the Moody's cut, the European Commission backed Italy after the country's rating was cut and Moody's also predicted a sharp rise in Rome's borrowing costs.

Ollie Rehn, European Commissioner for economic and monetary affairs, said the Moody's decision was "striking, if not unprecedented" and the German government also released a statement of support for Rome.

In an encouraging sign Italy still sold 5.25 billion euros of medium and long-term bonds on Friday with a three-year issue selling at an average rate of 4.65 percent compared with a yield of 5.30 percent at the previous sale in June.

However it was the lowest rate since May and investors still seem uncertain about whether Italy can escape the dire economic situation in Greece and Spain.

"Italy's near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets," Moody's said. "Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding."

Cinzia Alcidi, from the Center for European Policy Studies in Brussels, said the downgrade was no surprise since there was a general awareness of Italy's economic situation, but she said it was likely to affect market confidence all the same.

"The downgrade will have an impact because some portfolio managers base their investments on ratings," Alcidi told Xinhua.

European Union leaders last month reached a deal to enable two rescue funds, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), to aid struggling economies.

But Moody's believes there is a limit to what support can be provided and also thinks it will take years for the normalization of sovereign debt markets.

The Moody's decision pushed Italian bank shares down and kept the euro near two-year lows against the dollar on Friday.

Italy is the eurozone's third biggest economy after Germany and France. Some experts are not convinced that Italy may escape some kind of bailout in the future.

The 10-year bond yield, considered an important indication of investor confidence, closed at 6 percent on Friday. Anything higher will generate more concern in financial markets.

"Italian debt is sustainable at an interest rate which is not too high - probably below 7 percent - but may become unsustainable if interest rates becomes higher," Alcidi warned.

"From this perspective a bailout cannot be excluded given the current cost of debt refinancing and the risk of contagion. Of course this would pose huge problems," said the expert.

"Italy is a large country with a large debt and the resources of the EFSF/ESM are limited. I think that under that scenario only an intervention from the European Central Bank could be effective."

However, Professor Nicola Borri, an economist at Luiss University in Rome, told Xinhua on Friday the Moody's downgrade merely reflected a negative outlook on Italian debt which had already been discounted by the financial markets.

"The downgrade only confirms the concern with respect to the political uncertainty and the future government that will replace the current one less than a year from now," Borri said.

Moody's expressed concern about the increasing risk of a Greek exit from the euro and greater than expected losses in the Spanish banking system.

Professor Borri said while the risk of contagion was limited for now, Italy's economic outlook remained fragile.

"I think markets realize that the Italian government's deficit is under control for the moment," Borri said.

"Still, spreads against the German bond over 400 basis points clearly signal a serious concern that even if the economic situation is currently under control, it is very fragile and small shocks - for example, an election or a bank failure - could dramatically worsen it."

Coincidentally Italian prosecutors on Friday ended an investigation into Moody's as the New York-based ratings agency downgraded the country 's rating.

The investigation, launched by prosecutors in the southern town of Trani, accused Moody's of "spreading false, unfounded and imprudent judgements" on Italy's financial, economic and banking system, and "manipulating the market."

Responding to complaints from consumer associations Adusbef and Federconsumatori, the same office has also conducted investigations into the two other major New York ratings agencies, Fitch and Standard & Poor's.