Ratings agency Moody's slashed Spain's sovereign credit rating by a notch to Aa2 on Thursday and warned of further cuts, saying that the country's plans to clean up the battered banking sector will cost more than government expects and add to its debt burden.

Moody's Investors Service also said it had ongoing worries about the Spanish government's ability to achieve structural improvement in its finances, especially against a backdrop of moderate economic growth in the near- to medium-term.

A negative outlook reflects concerns that Spain's government finances remain skewed to the downside, the ratings agency said.

(Reporting by Eric Burroughs, Editing by Richard Borsuk)