Moody's has downgraded Greece's debt to "highly speculative" prompting an angry response from the finance ministry.
Greek bonds fell after the rating agency cut its rating from Ba1 to B1.
Moody's cited "endemic tax evasion", "very ambitious" austerity plans, and the possibility that the EU may force a debt restructuring on Greece after 2013 as reasons for its decision.
Greece's finance ministry said the move was "incomprehensible" and called for tighter regulation of rating agencies.
"Ultimately, Moody's downgrading of Greece's debts reveals more about the misaligned incentives and the lack of accountability of credit rating agencies than the genuine state or prospects of the Greek economy," said the Greek finance ministry in a statement.
"Having completely missed the build-up of risk that led to the global financial crisis in 2008, the rating agencies are now competing with each other to be the first to identify risks that will lead to the next crisis."
While recognising the "very significant progress" that Greece had made in reducing its deficit, Moody's said in its rating decision that the "task facing officials and managers remains enormous".
The agency noted in particular that Greece had failed to collect as much tax revenue as planned last year, and this was likely to be a continuing problem due to inadequate manpower at the tax office and "the inevitable resistance to tax compliance among parts of Greek society".
Of broader concern to the eurozone as a whole, Moody's was sceptical about the European Union's permanent bail-out facility, planned to come into operation in mid-2013.
Statements by European officials suggested that countries like Greece may have to meet a "solvency evaluation", the rating agency said.
If a country fails to demonstrate that it can ever hope to repay its debts, it may be required by its European partners to impose losses on its creditors.
The observation follows similar comments from counterpart Standard & Poor's earlier this month, who said plans to give rescue loans from the EU and IMF senior status meant that private creditors - including bondholders - would be in an even riskier position.
Moody's maintained a negative outlook for the country's rating, suggesting a further downgrade is more likely than an upgrade.
Greece received a 110bn euros ($154bn, £95bn) bail-out from the European Union and International Monetary Fund in May last year.
Cost of borrowing
The news caused yields on Greek government bonds to increase to their highest levels since early January, with the benchmark 10-year bond hitting 12.2% in mid-afternoon trading.
Meanwhile, Portugal's cost of borrowing has also continued to rise steadily, with its 10-year bonds hitting a new high of 7.5% on Monday.
And the Republic of Ireland' debt was trading at a yield of 9.27% - similar to the levels seen at the time of its bail-out in November.
Spain - whose economy is considerably bigger than the other three put together - remains some way below the highs seen in December, with its 10-year bond trading at a 5.4% yield.
However, not all of the increase in borrowing costs across the eurozone is due to the perceived riskiness of borrowers.
A stronger-than-expected revival of growth and inflation across the eurozone as a whole since the beginning of the year has helped push up yields even on German government bonds by some 0.7%.