Ratings agency Standard & Poor’s has downgraded Italy’s credit rating by one notch, saying it sees weakening economic growth prospects for the nation and higher-than-expected levels of government debt.

The firm cut Italy’s long- and short-term sovereign credit ratings to “A/A-1” from “A+/A-1+” on Monday. The rating is still five steps above junk status.

S&P has a negative outlook on Italy’s ratings and listed Italy’s political issues and heavy debt load as the main factors contributing to the downgrade. It expects political differences to limit Italy’s ability to respond decisively to its debt crisis.

“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 downgrade.

Last week, Italy’s parliament gave final approval to Premier Silvio Berlusconi’s government’s austerity measures, a combination of higher taxes, pension reform and spending cuts. The planned cuts and taxes sparked street protests in Rome similar to those in other European countries trying to come to grips with the economic crisis.

Berlusconi has said that the government’s austerity measures will shave more than 54 billion euros($A68 billion) off Italy’s deficit over three years.

The European Central Bank had demanded stiff austerity measures to calm markets over doubts about how serious Italy is about coming to grips with its debt. Italy is the eurozone’s third biggest and has a deficit to gross domestic product ratio of 120 per cent, one of Europe’s highest.

The bank has spent billions over the past month buying up Italian government bonds in a bid to lower Italy’s borrowing costs and keep it from becoming the next eurozone nation to need an international bailout. The S&P downgrade, however, could lead to higher borrowing costs for Italy because it implies that investors face greater risks when buying Italian debt.