MILAN: Standard & Poor’s on Monday downgraded Italy’s sovereign debt rating, citing economic, fiscal and political weaknesses in a fresh blow to Silvio Berlusconi’s fragile coalition government.

The rating agency said it had downgraded Italian debt to “A/A-1” from a “A+/A-1+” grade because of “Italy’s weakening economic growth prospects.” It added that Italy’s weak governing coalition would “limit the government’s ability to respond decisively” to events.

“We believe the reduced pace of Italy’s economic activity to date will make the government’s revised fiscal targets difficult to achieve,” S&P said in a statement.

It was more bad news for Italian Prime Minister Berlusconi who is under fire over the economy, in the courts and, increasingly, from the voters; his popularity plunged to 24 per cent in a September poll.

He appeared in a Milan court Monday for a hearing into claims he paid a lawyer 416,000 euros ($600,000) for false testimony about his business dealings.

He is also on trial for allegedly buying sex from a girl known as “Ruby the Heart Stealer” when she was a minor.

Standard & Poor’s in its analysis offered no succour to the beleaguered prime minister.

Low labor participation rates, an inefficient public sector and modest foreign investment flows were cited as key drags on growth.

“In our view, the authorities remain reluctant to tackle these issues,” the agency said.

Warning that another downgrade was likely, the ratings agency said a new recession in Italy was on the cards next year with the real economy declining by 0.6 per cent, followed by a “modest recovery” in 2013-2014.

S&P’s rival rating agency Moody’s has already indicated it is weighing its rating for Italy, which is currently at Aa2, two notches below Moody’s top triple-A rating.

Italy has tried to reassure investors by announcing a new austerity package which should see the country balance its budget by 2013.

Italy’s public debt rose to 1.911 trillion euros ($2.6 trillion) in July, Bank of Italy data showed last week, a month after it crossed the 1.9-trillion-euro mark for the first time.

Public debt in the eurozone is legally set to remain below 60 per cent of GDP. At about 120 per cent, Italy’s debt level is double that with the government projecting a fall to 119.4 per cent of GDP next year.

US President Barack Obama and German Chancellor Angela Merkel spoke by phone Monday with the need for action on the debt-laden eurozone high on the agenda.

“The two leaders agreed that concerted action would be needed in the months ahead to address the current economic challenges and to assure global economic recovery,” said a White House statement.

Eurozone members Greece, Ireland and Portugal have all needed EU-IMF bailout loans to avoid a debt default and there are fears that Spain and Italy are not too far behind.

Italy, as the third-largest economy in the eurozone, would present a different magnitude of a problem due to the size of the figures involved.