Credit ratings agency Moody's has cut Ireland's bonds to junk status and warned of further downgrades as the euro zone economy struggles to pull out of a financial crisis.

Moody's said it had reduced Ireland's government debt ratings by one notch, to Ba1 from Baa3, saying there was a 'growing possibility' that the country would need more bail-out aid in late 2013, when the current EU/IMF programme is due to end.

The agency said a key factor in the downgrade was the increasing possibility that investors holding government debt would have to take part in any new rescue deal, and would be likely to suffer losses as a result. It noted EU leaders' recent pressure for some form of private sector participation in a second bail-out for Greece, adding that such pressure would discourage investors from lending to Ireland and other struggling euro zone countries in future.

Moody's also acknowledged that Ireland had achieved its targets under the EU/IMF programme so far, adding that in the long-term, Ireland's potential growth prospects 'remain higher than those of many other advanced nations'.

Last week, Moody’s lowered Portugal’s debt rating to junk status, sparking fierce criticism from EU leaders and calls for a ban on rating agency decisions for countries under internationally-approved rescue packages.

A spokesman for the Department of Finance has described the Moody's decision as 'a disappointing development', saying it was at odds with the views of other rating agencies. Referring to the timing of the announcement, the spokesman said it was difficult to see how it reflected an agreement reached by euro zone ministers last night to increase the flexibility and scope of the current EU rescue mechanism.

In a statement, the National Treasury Management Agency noted the decision, saying that Moody's had acknowledged that Ireland was showing a strong commitment to budgetary consolidation and was delivering on its objectives as required under the EU/IMF plan.

The NTMA said the situation in the euro area ws evolving rapidly, and lastt night’s statement from euro zone ministers was positive for Ireland.

The agency pointed out that Ireland still held investment grade status with the other main ratings agencies.

Ireland to benefit from euro decisions - Noonan

Earlier, Finance Minister Michael Noonan said that any changes to Ireland's EU/IMF programme as a result of last night's agreement among euro zone finance ministers would yield benefits in the medium- to long-term, rather than the short-term.

Speaking to reporters after this morning's talks session in Brussels, Mr Noonan would not be drawn on the size of the interest rate reduction that could arise or on the overall reduction to Ireland's debt situation.

But he expressed confidence that the decision to make the European rescue mechanism more flexible meant that there was 'a new context', one which precluded any quid pro quo on Ireland's corporate tax regime.

He conceded, however, that a number of countries would be seeking to 'peg' any interest rate reduction to a maximum of one percentage point. 'Any individual country will have a say,' he said.

While describing last night's agreement as a 'policy breakthrough', he nonetheless urged caution on the size and time scale of a reduction to Ireland's debt level.

Asked about the danger of continuing turbulence in the sovereign bond market upending any new deal, Mr Noonan said Ireland was like 'a cork bobbing on a very turbulent ocean'.

He said turmoil in the markets was likely to continue until the results of the stress tests on European banks were published on Friday evening. Mr Noonan said the Government would continue to negotiate the detail of last night's agreement in order to translate it into benefits for Ireland's debt situation.

Last night's statement from ministers was focused on the Greek debt crisis and its potential to draw much bigger euro zone economies, like Italy, into the turmoil.

With growing speculation that euro zone countries needed another rethink over how to draw a line under the 18-month old crisis, there were expectations that a more flexible approach might be agreed.

The statement issued indicates that flexibility will be applied to the European Financial Stability Facility. It is worth about €440 billion and was created last year as one of the main backstops to prevent another Greek crisis.

Ireland was the first beneficiary of the EFSF and the plan to make it more flexible still could, according to Irish officials, lead to further reductions in Ireland's debt level.

By making the EFSF more flexible it could be used to buy Irish bonds in the secondary market. As those bonds are sold at a cheaper rate than the original value, that would mean a debt saving for Ireland.

At the news conference after the meeting, the chairman of the Eurogroup Jean-Claude Juncker also confirmed that a lower interest rate would be agreed for all bail-out countries, although he didn't specify by how much.

The move could also mean longer debt maturities, special guarantees and credit lines - but key questions remain, including whether these changes will have to be passed by all 17 euro zone parliaments.