The eurozone economy plunged back into crisis on Friday as France and Austria were stripped of their top triple-A credit ratings and Standard and Poor's downgraded a swathe of debt-laden EU members.
Only Germany escaped unscathed, as all other eurozone members were either downgraded -- some by two notches -- or else warned their current ratings were being re-examined amid fears about sovereign deficits.
Meanwhile, talks between private banks and Greece's technocratic government on a managed write-down of Athens' debt stalled, raising the prospect of a messy default in one of the eurozone's weakest states.
S&P is only one agency, rivals Moody's and Fitch have not issued the same downgrades, but the long-expected news hit the markets.
As news of the report card leaked out through the day the euro plunged to a 16-month low against the dollar, on what was a grim Friday for EU policy makers, and in particular for France's President Nicolas Sarkozy.
In a statement released after US markets closed, S&P said an EU fiscal pact agreed last year "has not produced a breakthrough of sufficient size and scope to fully address the eurozone's financial problems."
The statement said France and Austria's top AAA rating had been cut by one notch to AA+ -- with a negative outlook -- while it left European powerhouse Germany unchanged at AAA, stable.
The US firm cut its long-term ratings on Cyprus, Italy, Portugal and Spain by two notches. Malta, Slovakia and Slovenia by one notch.
Belgium, Estonia, Finland, Ireland, Luxembourg and the Netherlands all had their current ratings confirmed, but were placed on "negative watch" -- meaning they could be downgraded in due course.
"It's not good news but it's not a catastrophe," French Finance Minister Francois Baroin said, adding defiantly: "It's not ratings agencies that decide French policy."
Germany spoke up to defend its weaker neighbours. "France is on the right track," Finance Minister Wolfgang Schaeuble said.
His ministry said that by "anchoring concrete fiscal rules in a binding agreement, we will stabilise the public finances of the eurozone's members, helping to restore and maintain market confidence in a sustainable manner."
The S&P decision could also have a negative impact on the eurozone's debt bailout fund, which relies on the credibility of the six top-rated nations.
A downgrade of the European Financial Stability Facility would increase its borrowing costs, making it harder for the EFSF to raise funds for a bailout.
"The shareholders of the EFSF affirm their determination to explore the options for maintaining the EFSF's AAA rating," eurogroup head Luxembourg's Prime Minister Jean-Claude Juncker said in a statement.
But a European official, noting France supplies one-fifth of the fund, said: "Now there is a risk the EFSF will lose its triple-A. It's a real problem."
The downgrade could also force France's borrowing costs up at a time when it has already been forced to implement a package of austerity measures to control its deficit and was a political humiliation for Sarkozy.
Sarkozy -- who hosted crisis talks with his top economics ministers at the Elysee -- faces a tough re-election battle in less than 100 days and reportedly told allies last month: "If we lose the triple-A, I'm dead."
Europe's main stock markets opened optimistically but were all slightly down at the close with London's FTSE 100 losing 0.46 per cent, Frankfurt's DAX sliding 0.58 per cent and in Paris the CAC 40 shedding 0.11 per cent.
American stocks also fell on opening and then finished with modest losses.
There was further bad news from debt-wracked eurozone minnow Greece, when a group representing major private lenders said they had failed to reach an agreement to slash its debt burden.
Talks on a Greek write-down have "not produced a constructive consolidated response by all parties," said the Institute of International Finance, which represents private bank creditors.
The proposed deal would have seen banks taking a 50-per cent "haircut" on their holdings of Greek debt, which would remove about 100 billion euros ($127 billion) from Athens' massive burden and avoid a full-blown default.
"Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach," the IIF said.
"There is extreme tension," a source in Athens confirmed to AFP. "All parties involved in this crucial negotiation ought to be aware of this very grave condition and assume their responsibilities to avoid the worst."
European leaders are due to meet in Brussels on 30 January to nail down details of a fiscal pact designed to reassure bond markets that their deficit reduction plans are on course and their debt is safe.