Britain's AAA credit rating was thrown into doubt after the ratings agency Moody's said the ongoing euro crisis and a credit squeeze on the banking sector put the country at a higher risk of defaulting on its debts.

Moody's said that countries including the UK, France and Italy would be put on negative watch after citing "uncertainty" over Europe's handling of its ongoing debt crisis.

The possible loss of the UK's much coveted triple-A status will be a bitter blow for the chancellor George Osborne who has staked his reputation on distancing Britain from the ailing eurozone.

Riots and looting on the streets of Athens highlighted the confusion at the highest levels of the European political establishment over how to deal with the mounting debts faced by Greece. Brussels rejected handing over €130bn without further commitments from the Athens parliament and proposals for further cuts to be implemented this year.

Osborne was expected to stick to his aim of reducing Britain's "structural deficit" by 2017 when he stands up in parliament next month to deliver his third budget since the coalition took power in 2010.

But the verdict of Moody's will add to the pressure from opposition MPs and many economists on him to change course. Moody's said it was concerned that he would miss previous targets to cut the deficit by 2015.

The AAA rating is the highest awarded to a country and allows it to borrow at the lowest interest rates.

The rating agency said it was making the changes "in order to reflect their susceptibility to the growing financial and macroeconomic risks emanating from the euro area crisis."

The Bank of England and the Treasury's independent Office for Budget Responsibility have both lowered their expectations of economic growth for this year to below 1% from above 2.5% in last year's forecasts made last year.

Osborne said that Moody's decision meant the government should stick to its course: "This is proof that, in the current global situation, Britain cannot waver from dealing with its debts.

"Moody's are explicit that it is only the government's 'necessary fiscal consolidation' that is stopping an immediate downgrade, which would happen if there were any 'reduced political commitment to fiscal consolidation including discretionary loosening'. This is a reality check for anyone who thinks Britain can duck confronting its debts."

Moody's has urged western nations hit by high debts to prioritise programmes that will spur growth alongside austerity measures to cut deficits built up in the wake of the 2008 financial crash.

Ed Balls, the shadow chancellor, said: "This is a significant warning to a Chancellor who himself made balancing the books by 2015 and the views of the credit rating agencies the key benchmarks for the success of his economic policy ... Moody's is clear in its statement that the primary reason for Britain's negative outlook is 'weaker growth prospects' which are making it harder to get the deficit down.

"With our economy now in reverse, unemployment at a 17-year high and £158bn extra borrowing to pay for economic failure, the case for a change of course and a real plan for jobs and growth is growing by the day."

Moody's said its decision was based on: • Uncertainty over the euro area's prospects for institutional reform of its fiscal and economic framework and the resources that will be made available to deal with the crisis.

• Europe's increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness.

• The impact that Moody's believes those factors will continue to have on market confidence, which is likely to remain fragile, with a high potential for further shocks to funding conditions for stressed sovereigns and banks.

On the UK, Moody's said it was concerned by had "materially weaker growth prospects over the next few years, with risks skewed to the downside.

Any further abrupt economic or fiscal deterioration would put into question the government's ability to place the debt burden on a downward trajectory by fiscal year 2015-16."

"Although the UK is outside the euro area, the high risk of further shocks (economic, financial, or political) within the currency union are exerting negative pressure on the UK's AAA rating given the country's trade and financial links with the euro area.

"Overall, Moody's believes that the considerable uncertainty over the prospects for institutional reform in the euro area and the region's weak macroeconomic outlook will continue to weigh on already fragile market confidence across Europe," said Moody's.

• This article was amended on 14 February. The picture caption originally said that nine countries had been downgraded