Moody's Investors Service on Tuesday cut Spain's sovereign ratings by two notches, saying high levels of debt in the Spanish banking and corporate sectors leave the country vulnerable to funding stress.

Further downgrades of Spain's rating are possible if the euro zone debt crisis escalates, Moody's warned.

The agency cut Spain's government bond ratings to A1 from Aa2, concluding the review for a possible downgrade it had initiated at the end of July. The new rating has a negative outlook.

(Reporting by Walter Brandimarte; Editing by James Dalgleish)