Story highlights The downgrade could be "very damaging," an analyst warns

Fears of a break-up of the eurozone are "greatly exaggerated," an expert says

European markets are up early despite downgrade

S&P cut Italy's credit rating on Monday

Italian Prime Minister Silvio Berlusconi Tuesday blasted the downgrading of his country's debt by ratings agency Standard & Poor's, saying it was more influenced by politics and newspaper reports than by economic reality.

"Italy has issued interventions that aimed at balancing the budget in 2013 and the government is preparing measures in favor of growth, the fruits of which will be seen in the short-long term period," Berlusconi said in a statement.

Markets were up in Europe Tuesday morning, even in Italy, after the downgrade.

The agency cut Italy's sovereign credit rating late Monday, saying the nation's weakening economic growth and political uncertainty have dented its financial stability.

S&P now rates Italy's credit at A, down from A+ , and kept its outlook on the country as negative, the agency said in its report.

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Analyst Gary Jenkins of Evolution Securities warned that the downgrade could be "very damaging," since it came from the rating agency that already gave Italy the worst marks. Moody's and Fitch's, the other two major ratings agencies, did not change their outlooks for Italy.

A top analyst at Fitch's said that fears for the future of the euro were "greatly exaggerated," despite nervousness about debt across the continent.

"Concerns over the risk of a break-up of the eurozone are greatly exaggerated," said David Riley, head of global sovereign ratings at the agency.

Italy's is the third largest economy in the eurozone, the group of 17 European Union nations that use a common currency.

Its economy was worth about 394 billion euros ($539 billion) at the end of June, according to Michael Symonds, an analyst at Daiwa Capital Markets.

That's about 17% of the entire eurozone economy -- nearly seven times bigger than the economy of Greece, which is negotiating for its latest infusion of international bailout money in the face of its own debt crisis.

Italy has largest outstanding debt in the euro area -- about 1.9 trillion euros ($2.6 trillion), according to Elisabeth Afseth of Evolution Securities, although Greece has the highest debt as a percentage of GDP.

The downgrade could reverberate into French and German banks, Symonds warned.

"French banks have been active lenders to the private sector in Italy, with $256 billion of exposure reported as of end-March," he said.

Italy has covered about three-quarters of its debt funding needs for the year, but still needs to raise 100 billion euros before the end of 2011, Deutsche Bank's "Early Morning Reid" analysis newsletter said Tuesday.