The credit rating agency Fitch has told euro zone countries it believes a comprehensive solution to their debt crisis is beyond reach, putting six euro zone economies including Italy on watch for potential downgrades in the near future.
It reaffirmed France's top-notch triple-A rating but even here said the outlook was now negative, meaning it could be downgraded within two years.
Underscoring the tensions within the bloc over a crisis that has spread relentlessly over the past two years, Italy's prime minister urged European policymakers on Friday to beware of dividing the continent with efforts to fight its debt crisis.
In a swipe at Germany, he warned against a short-term hunger for rigor in some countries.
Germany has led resistance to allowing the European Central Bank to ramp up its buying of government bonds on the open market to a big enough scale to douse the crisis, but Fitch late on Friday added to the pressure for just such a move.
It said that, following the EU summit a week ago, it had concluded that a 'comprehensive solution' to the euro zone crisis is technically and politically beyond reach.
Of particular concern is the absence of a credible financial backstop, it said. In Fitch's opinion this requires more active and explicit commitment from the ECB to mitigate the risk of self-fulfilling liquidity crises for potentially illiquid but solvent Euro Area Member States.
It put Belgium, Spain, Slovenia, Italy, Ireland, and Cyprus on negative watch, which could mean a downgrade within three months.
Later another agency, Moody's, cut Belgium's credit rating by two notches, saying the euro zone debt crisis raised funding risks for countries with high public debt burdens, and said a further downgrade was possible within two years.
Standard & Poor's had already warned 15 of the currency bloc's 17 members they were close to a downgrade.
The systemic nature of the euro zone crisis is having a profoundly adverse effect on economic and financial stability across the region, Fitch said.
The euro edged higher against the dollar but still suffered its worst weekly performance against the greenback in three months.
German Chancellor Angela Merkel gained some respite from domestic pressure to take a tougher line in the crisis when eurosceptics in her junior coalition partner, the Free Democrats, lost a grassroots party referendum aimed at blocking a permanent euro zone rescue fund.
A victory for the eurosceptics could have brought down Merkel's centre-right coalition, but the outcome still left the FDP split, with its public support in tatters.
Meanwhile, a first draft of a planned fiscal compact among euro zone countries and aspiring members, published on Friday, showed that countries could be taken to the European Court of Justice if they did not meet agreed budget goals.
Merkel - under pressure from the revered Bundesbank to force debt-saddled euro zone countries to reform and save their way out of crisis with austerity measures - has led a push for automatic sanctions for deficit sinners in the bloc.
This has fed concerns that excessive belt-tightening in southern countries could send their economies into a negative spiral with no prospect of growing out of crisis, while feeding resentment in the prosperous north.
Italian Prime Minister Mario Monti said Europe's response should be wrapped in a long-term sustainable approach, not just to feed short-term hunger for rigor in some countries.
To help European construction evolve in a way that unites, not divides, we cannot afford that the crisis in the euro zone brings us ... the risk of conflicts between the virtuous North and an allegedly vicious South, he told a conference in Rome.
French officials have sought to prepare the public for the likelihood that Paris will lose its top-notch rating from S&P for the first time since 1975, playing down the potential setback and focusing attention instead on neighboring Britain. President Nicolas Sarkozy had vowed to keep the top rating, and it could become an issue in next year's election campaign.
The economic situation in Britain today is very worrying, and you'd rather be French than British in economic terms, Finance Minister Francois Baroin said in a radio interview, a day after Bank of France Governor Christian Noyer said that if ratings agencies were even-handed, Britain deserved to be downgraded before France.
Deputy Prime Minister Nick Clegg said French Prime Minister Francois Fillon had called him to explain that it had not been his intention to call into question the UK's rating but to highlight that ratings agencies appeared more focused on economic governance than deficit levels.
Clegg's office said he accepted the explanation but made the point that recent remarks from members of the French government about the UK economy were simply unacceptable and that steps should be taken to calm the rhetoric.
World Bank President Robert Zoellick said he was deeply troubled by the exchanges.
He said politicians needed to be careful because you've got a tinderbox out there in both political and economic terms.
Euro zone officials said potential downgrades, particularly from S&P, could raise the cost of borrowing for the region's existing EFSF bailout fund, but would not make a big difference to its operations.
EFSF chief Klaus Regling told the Rome conference about 600 billion euros was available to fight the crisis.
If Italy and Spain were to ask for support, their gross financing needs for 2012 are less than that and I don't think they would need to be taken off the market, he said.
The EFSF has the option of providing first-loss insurance on new bond issues, but the country concerned would have to make a formal request and negotiate conditionality, while the sum guaranteed would have to be agreed unanimously by EFSF members, subject to German parliamentary approval.
Euro zone countries will hold talks next Monday on the draft text of the euro zone fiscal compact and on bilateral loans to the International Monetary Fund, officials in Brussels said.
Slovak Finance Minister Ivan Miklos told Reuters they would commit 150 billion euros to boost the IMF's lending capacity.
The United States has refused to offer additional funding and it remains to be seen how much countries such as China, Russia, Brazil and India are willing to commit.
The European Central Bank has resisted calls for unlimited purchases of euro zone sovereign bonds to quell the debt crisis, putting the onus on governments and their collective financial firewalls.
ECB President Mario Draghi said on Thursday that euro zone governments were on track to restore market confidence and the ECB's bond-buying plan was neither eternal nor infinite.
But in one intriguing hint on Friday, Bank of Italy governor Ignazio Visco told the Rome conference: The impression is that there is only one way to convince markets, and we'll work on that. He did not elaborate.
Banks appear to be resisting pressure from governments to help debt-choked euro zone countries by using cheap money lent by the ECB to buy more sovereign bonds.
The chief executive of UniCredit, one of Italy's two biggest banks, said this week that using ECB money to buy government debt wouldn't be logical.
Euro zone governments need to sell almost 80 billion euros of fresh debt in January alone, and the stand-off between policymakers and banks could turn the slow-burning debt crisis into a conflagration in the New Year.
In Greece, where the debt crisis began two years ago, a senior official of the EU/IMF troika team negotiating terms for a second bailout package said there was no guarantee that talks on the private sector's contribution would lead to a voluntary deal involving the bulk of its creditors.
Agreement has been held up by wrangling over issues ranging from the credit status and interest coupons on the new bonds to legal guarantees to be offered by the official sector. One key question is how many sign up to a private sector debt swap.
Failure to secure agreement could force a disorderly default that might trigger a wider emergency across the euro zone.
Asked if there was a risk of a disorderly Greek default, the troika official said: Our objective is still to have a voluntary operation. If you ask me 'Is there a guarantee that there will be a voluntary operation?', of course there can never be a guarantee.
(Additional reporting by Steve Scherer in Rome, Annika Breidthardt in Berlin, Gareth Gore, Natsuko Waki, Kirsten Donovan and Ana Nicolaci da Costa in London, Martin Santa in Bratislava, Ingrid Melander in Athens; Writing by Paul Carrel and Paul Taylor/Ruth Pitchford; Editing by Jeremy Gaunt and Kevin Liffey)