Moody's Investors Service warned yesterday that it may cut Italy's credit rating, citing growth risks in the economy, a large budget deficit and ongoing debt woes in Europe.

Moody's said it placed Italy's Aa2 local and foreign currency government bond ratings ‘on review for possible downgrade, while affirming its short-term ratings at Prime-1.’

‘The Italian economy faces growth challenges in an environment characterised by long-term structural impediments to growth and potentially rising interest rates,’ the ratings agency said in a statement.

‘Structural economic weaknesses - mainly low productivity and important labour and product market rigidities - have been a major impediment to growth in the last decade and continue to hinder the economy's recovery from the severe recession it experienced in 2009.’

Amid rising interest rates and weak gross domestic product growth, the government may find it difficult to put the public debt-to-GDP ratio and the interest burden on a solid downward track, the agency explained.

The Moody's warning came after two sharp election defeats for the Italian Prime Minister, Silvio Berlusconi.

Moody's highlighted rising concerns about debt levels in the eurozone.

‘The fragile market sentiment that continues to surround European sovereigns with high levels of debt poses additional risks for Italy,’ Moody's said.

‘The continued stability of market demand for Italy's debt is uncertain at current yields.’

On 20 May, another of the three major ratings agencies, Standard & Poor's, placed Italy on alert for a possible downgrade.

S&P warned it could lower Italy's rating to A+, its fifth-ranked rating and equivalent to Moody's A1.

Italy's rating with Moody's has been unchanged since May 2002, when it was raised a notch.