Standard and Poor's downgrades US rating to AA+ for the first time ever, as tension prevails at global stock markets.
The United States has lost its top-notch AAA credit rating from Standard & Poor's, in a dramatic reversal of fortune for the world's largest economy.
S&P cut the long-term US credit rating by one notch to AA-plus on Friday, citing the country's looming debt and deficit burden.
US Treasuries, once undisputedly seen as the safest investment in the world, are now rated lower than bonds issued by countries such as the UK, Germany, France or Canada.
The outlook on the new US credit rating is negative, S&P said in a statement, a sign that another downgrade is possible in the next 12 to 18 months.
"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilise the government's medium-term debt dynamics," S&P said in the statement.
The US Treasury hit back against the move, saying there was a $2 trillion error in the agency's calculations.
"A judgment flawed by a 2 trillion dollar error speaks for itself," a Treasury spokesman said.
Earlier a US official involved in the negotiations with the agency attacked its analysis as deeply flawed.
"There are deep and fundamental flaws with the S&P analysis," the official said.
The move by S&P came as around $2.5 trillion were wiped off the value of global equities this week.
Hopes the European Central Bank will buy the bonds of Italy's heavily indebted government and better than expected US monthly employment data helped lift markets off the lows, but the news were not enough to spur sustained buying after an early bounce.
Wall Street stocks gained some support in a heavily traded session on Friday, a day after indexes posted their worst losses in two years.
The Dow Jones industrial average eked out a small gain, rising 0.5 per cent.
Italy, under pressure to help halt the market rout that is endangering the global economy, pledged to speed up austerity measures and social reforms in return for European Central Bank help with funding.
The European Central Bank (ECB) agreed on Friday to start buying up Italian bonds from Monday in return for a promise from the government to accelerate deficit cuts, Italy's Federalism Reforms Minister Umberto Bossi.
"Everyone is afraid our bonds will turn into scrap paper but by returning to budget balance one year early, the ECB has guaranteed that from Monday it will buy our bonds," he said.
"For us it's a solution, a guarantee," said Bossi, who is also the leader of the Northern League party, the main partner in Berlusconi's centre-right coalition.
As Europe scrambled to head off pressure on the single currency zone, Italian Prime Minister Silvio Berlusconi said after telephone talks with French President Nicolas Sarkozy that G7 finance ministers would meet "in a few days".
"The situation is very difficult and requires coordinated action. We have to recognise that the world has entered a global financial crisis that concerns all countries," Berlusconi said after talks with several European leaders.
Italian shares plunged over 13 per cent this week, while investors scared the country's slow growth means it will get caught up in a debt trap sold off their bonds, sending rates of return over 6 per cent.