Credit ratings agency Moody's Investors Service has downgraded Italy's government bond rating two notches on concern that deteriorating financial conditions in Europe will lead to a sharp rise in borrowing costs.

The agency lowered the rating from Baa2 to A3 because it says fragile market confidence and risk of contagion from financial problems in Greece and Spain have increased the risks Italy faces. Moody's also says it's worried about a diminished willingness among overseas investors to buy the country's bonds.

The downgrade is another blow to a European economy that is flailing from the effects of austerity measures brought on by high government debt. Moody's says Italy's short-term economic outlook has deteriorated as evidenced by weaker growth and rising unemployment.