Image caption Many workers have protested against Portuguese austerity measures

International ratings agency Moody's has downgraded Portugal's sovereign debt rating, citing worsening public finances and weak growth prospects.

It cut the rating by two notches from the maximum AA2 to A1.

And it said it Portugal might need further austerity measures, as well as those already announced.

The euro fell against the dollar and sterling but market reaction was muted. Rival agency Standard & Poor's already rates Portugal two grades lower at A-.

The downgrade means that the rating agency is losing confidence in the Portuguese government's ability to meet its financial obligations.

Tax rises

A sovereign debt downgrade tends to make it more expensive for a government to raise money on the international markets.

However, the bonds are still some way from the "junk" status suffered by Greece.

The eurozone crisis has caught many people on the hop, but there are those who would say it's been waiting to happen since the euro began Stephanie Flanders, BBC economics editor Read Stephanie's blog

The latest available figures show Portugal's total government debt stood at roughly 77% of GDP at the end of 2009.

This is quite similar to the numbers in countries such as France and Germany, two of Europe's economic powerhouses.

However, Portugal's economy is significantly smaller in absolute terms and is not expected to revive any time soon.

The European Union has been anxious to see more fragile European economies - including Portugal - impose tougher austerity measures.

The Socialist government of Jose Socrates has announced a range of measures aimed at cutting the deficit to 7.3% this year and 4.6% in 2011.

Top earners in the public sector, including politicians, will see a 5% pay cut.

VAT will rise by 1% and there will be income tax rises for those earning more than 150,000 euros. By 2013, they will face a 45% tax rate.

By 2013, military spending will have been cut by 40%. The government is also delaying the launch of two high-speed rail links - the Lisbon-Porto and Porto-Vigo routes.