The rating was cut two notches to Baa2 from A3, two levels above junk status.
On Thursday Italy raised 7.5bn euros (£6bn) in one-year bonds at a much lower rate than previously, suggesting improved investor confidence.
But in a statement, Moody's said that Italy's near-term economic outlook had "deteriorated" and that access to credit markets could toughen.
On Friday Italy is due to go to the financial markets to raise about 5.25bn euros in an auction of medium and long-term government bonds.
Moody's said that Italy was now "more likely to experience a further sharp increase in its funding costs or the loss of market access" for borrowing to service its budget.
The ratings agency added: "The risk of a Greek exit from the euro has risen, the Spanish banking system will experience greater credit losses than anticipated, and Spain's own funding challenges are greater than previously recognized.
"Italy's near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets.
"Failure to meet fiscal targets in turn could weaken market confidence further, raising the risk of a sudden stop in market funding," Moody's said.
Last month European Union leaders reached an agreement to enable two rescue funds, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), to help debt-laden economies.
But Moody's said "there is a limit to the extent to which these support mechanisms can be used to backstop such a large, systemically important sovereign" debtor such as Italy.
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