Ratings agency Moody's has said that it was placing the US's AAA debt rating on a downgrade watch because of rising prospects the US debt limit will not be raised in time to avoid default.

Moody's said in a statement: 'The review of the US government's bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes.

'As such, there is a small but rising risk of a short-lived default.'

Moody's said that it had announced on 2 June that a rating cut would be likely 'in mid-July unless there was meaningful progress in negotiations to raise the debt limit'.

'Moody's considers the probability of a default on interest payments to be low but no longer to be de minimis,' the agency said.

The action came as US President Barack Obama and Democratic politicians and their opposition Republican counterparts were holding a fourth straight day of talks to try to hammer out an agreement on a deficit-reduction budget.

Republicans are refusing to lift the country's $14.29 trillion debt ceiling without deep government spending cuts.

They have also rejected the additional tax increases sought by Democrats.

The US Treasury Department reacted swiftly to the Moody's warning.

'Moody's assessment is a timely reminder of the need for Congress to move quickly to avoid defaulting on the country's obligations and agree upon a substantial deficit reduction package.'