Italy’s credit was cut by Moody’s Investors Service Friday to the lowest investment-grade rating, in a move that will likely add further selling pressure on Italian bonds and raise borrowing costs for the debt-laden country.

Italy’s bonds had already sold off again on Friday before recovering later in the day. This past week, selling also spread to other Southern European economies, in a worrying sign for investors who until recently hoped that market jitters would be contained.

Moody’s...