Ratings agency Moody's Investors Service has downgraded Italy's government bond rating two notches over concerns that the country is more likely to experience a further sharp increase in its funding costs or the loss of market access amid rising eurozone risks and deteriorated economic outlook.

The firm lowered Italy's bond rating to Baa2, two levels away from junk territory, from A3. The outlook remained negative, reported Xinhua.

Moody's said in a statement that the risks Italy faces rose amid increasingly fragile market confidence, contagion risk from Greece and Spain, and signs of an eroding non-domestic investor base. 

The firm noted the risk of a Greek exit from the eurozone had risen and Spain's banking system will experience greater credit losses than anticipated. 

Besides the external risks from the region, Italy also faces a deteriorated economy in the near term. Moody's said both weaker growth and higher unemployment indicated a weakening economy, which created risks of failure to meet fiscal consolidation targets, pressuring the already shaky market confidence. 

Moody's was now expecting Italy's gross domestic product growth to contract by 2 percent in 2012. 

It was the second downgrade in five months for Italy. Moody's downgraded the country, along with Spain and Portugal, in February.