The United States lost its top-tier AAA credit rating from Standard & Poor's, drawing a blast of criticism on Saturday from its biggest creditor China and deepening investors' alarm over the euro zone's debt crisis.
China said Washington only had itself to blame and called for a new stable global reserve currency.
"The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone," China's official Xinhua news agency said in a harshly worded commentary.
The S&P cut in the U.S. long-term credit rating by a notch to AA-plus resulted from concerns about the nation's budget deficits and climbing debt burden. The move is likely to eventually raise borrowing costs for the U.S. government, companies and consumers.
By calling the outlook "negative," S&P signalled another downgrade is possible in the next 12 to 18 months.
Worries that the United States was slipping into recession and the euro zone debt crisis was spreading drove a week-long rout in which $2.5 trillion was wiped off global markets.
Better-than-expected U.S. jobs growth in July helped support Wall Street on Friday but stocks slipped back into the red in late trading.
China roundly condemned the United States for its "debt addiction" and "short sighted" political wrangling and said the world needed a new stable global reserve currency.
"China, the largest creditor of the world's sole superpower, has every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets," the Xinhua commentary said.
It urged the United States to cut military and social welfare expenditure. It also said further credit downgrades would very likely undermine the world economic recovery and trigger new rounds of financial turmoil.
"International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country," Xinhua said.
British business minister Vince Cable backed China's call for a new stable global reserve currency but said that for the moment the U.S. dollar remained key.
"This argument's been around a long time and it would be a sensible way for the world to move but it's not something we're going to do overnight," Cable told BBC TV.
Cable has been a vocal critic of the U.S. Congress's protracted arguments to agree a deficit-cutting deal and had warned Washington's sovereign debt rating was at risk.
"In the short run, the United States dollar is the key international currency and although, frankly, the American legislators made a terrible mess of things a few weeks ago, they have now got back on track, they have undertaken to manage their debt in a prudent way," he said.
S&P blamed in part the political gridlock in Washington, saying politics was preventing the United States from addressing its deficit and debt problems.
Euro zone crisis graphics r.reuters.com/hyb65p
Euro zone bond spreads r.reuters.com/kus82s
Insider: Pimco and Fidelity link.reuters.com/fet92s
Insider TV show on euro crisis reut.rs/nDFTKX
BREAKINGVIEWS-An ugly political paralysis
While the impact of the rating cut on financial markets when they reopen on Monday may be modest because the decision was expected, the shift may have a major long-term impact for the U.S. standing in the world, the dollar's status, and the global financial system.
"The global system must now adjust to the many implications and uncertainties of the once-unthinkable loss of America's AAA," Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co., which oversees $1.2 trillion in assets, told Reuters.
In Europe, Italy buckled to world pressure by pledging to bring forward cuts to balance the budget in 2013 in return for European Central Bank help with funding.
"We consider it appropriate to introduce an acceleration of the measures which we introduced recently in the fiscal planning law to give us the possibility of reaching our objective of balancing the budget early, by 2013 instead of 2014," Prime Minister Silvio Berlusconi told a news conference after a day of calls with world leaders including German Chancellor Angela Merkel and U.S. Treasury Secretary Timothy Geithner.
Berlusconi said finance ministers from the Group of Seven nations would meet in "just a few days" to seek a common plan of action but his spokesman said later the idea had not yet been agreed with Italy's partners.
The White House said U.S. President Barack Obama had spoken separately with Merkel and French President Nicolas Sarkozy about the euro zone crisis but offered no details.
Discord among EU policymakers over how to stop a disastrous spread of the sovereign debt crisis to Italy and Spain, the euro zone's third and fourth biggest economies, has frustrated investors.
The European Central Bank disappointed markets by buying Irish and Portuguese bonds but not government paper in Italy and Spain where bond yields have blown out this week on fears they may need bailing out.
That now appears to have been a gambit to force Italy to act.
ECB board member Jose Manuel Gonzalez-Paramo said he expected Spain to announce further measures on Aug. 19 to ensure it meets its budget austerity targets.
Earlier in the day, China and Japan called for coordinated action to avert a new worldwide crisis sourced to Europe and the United States, as did EU Econmic and Monetary Affairs Commissioner Olli Rehn.
"International policy coordination through the G7 and G20 is of critical importance," Rehn told a news conference, having broken off his vacation and returned to Brussels.
Britain called for a "concerted international effort" to show governments would work together to avert a financial crisis and Brazil also urged unity, saying the world economy was "in a situation of stress."
In BRIC nation India, the prime minister's chief economic adviser said the country's economic growth would not be affected by the cut in the U.S. credit rating.
"I don't think India will be much affected beyond the temporary market jitters and we should still grow at 8.2 pct (this fiscal year)," C.Rangarajan, Chairman of the Prime Minister's Economic Advisory Council, said.
"The U.S. has to show that they have a credible plan of fiscal consolidation and clearly the recent deal is not enough."