France has lost its top AAA credit rating from Standard & Poor's and eight other eurozone governments have also been downgraded by the ratings agency.
Italy, Spain, Cyprus and Portugal were cut two notches, with the latter two given "junk" ratings. Germany kept its AAA rating, and with a stable outlook.
S&P blamed the failure of eurozone leaders to deal with the crisis, or even diagnose its causes correctly.
Rumours of S&P's move prompted stock markets to fall earlier in the day.
Austria, like France has lost its top AAA rating, and been downgraded to AA+. Its economy exports a lot to recession-struck Italy, while its banks are facing losses on subsidiaries they own in financially troubled Hungary.
S&P's rating of Italy - currently at the epicentre of the crisis - has been cut two notches from A to BBB+.
Spain was also cut two notches from AA- to A, as was Portugal, whose rating fell from BBB- to a "junk" rating of BB - indicating a very high level of risk for lenders.
Apart from Germany and lower-rated Slovakia, all the other countries being reveiwed were given a "negative outlook", meaning there is a 30% chance of a further downgrade.
"Today's rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone," said S&P in its statement.
The agency said the plan currently being discussed by eurozone leaders - to limit governments' future borrowing - was based on a misdiagnosis of the cause of the financial crisis.
It said the crisis was more to do with trade deficits and a loss of competitiveness by "periphery" eurozone economies such as Italy and Spain, than excess borrowing by governments.
The agency also praised the ECB for taking action to stop a total collapse in market confidence in the eurozone late last year.
French Finance Minister Francois Baroin confirmed the news about his own country ahead of S&P's announcement on Friday night.
"It's not good news, but it's not a catastrophe," Mr Baroin said following emergency talks called by President Nicolas Sarkozy with the prime minister and other key ministers.
He said the French government was not planning any additional spending cuts or tax rises as a result of the downgrade: "It's not ratings agencies that decide French policy."
Meanwhile, European economic affairs commissioner, Olli Rehn, said that he regretted "the inconsistent decision [by S&P]... at a time when the euro area is taking decisive action in all fronts of its crisis response."
France is being downgraded just one notch by S&P, to AA+.
The country still has a top AAA rating from the other two main ratings agencies, Moody's and Fitch.
Earlier, the euro hit a new 16-month low against the dollar of $1.263 on rumours of the multiple downgrades, before rebounding.
It also dropped against the pound, hovering at about 82.9 pence.
Markets were also spooked by news that talks between Greece and its private sector lenders over a restructuring of its debts - including a 50% forgiveness - had broken down.
An agreement is a precondition for Greece receiving its next round of bailout money from the European Union and International Monetary Fund, without which it faces the risk of running out of money to repay its debts, and a possible exit from the eurozone, in the coming months.
London's FTSE 100 ended the day down 0.5% and Frankfurt's Dax 0.6%, while the Dow Jones in New York fell 0.4%, although it was widely expected that the ratings cuts were coming.
Credit ratings are used by banks and investors to decide how much money to lend to particular borrowers.
The cut in the so-called sovereign ratings of governments is likely to lead to most other borrowers domiciled in the same countries - including banks and companies - being downgraded.
Although the move has been widely expected, it is still likely to make it somewhat more difficult and expensive for borrowers from those countries to raise money, including for the governments themselves.
Italy's 10-year implied cost of borrowing in bond markets jumped by a third of a percentage point after the rumours emerged, but ended the day largely unchanged at just over 6.6%.
France's borrowing cost rose slightly, from 3.03% to 3.07%. Germany - considered the safest borrower in the eurozone - saw its borrowing cost fall from 1.83% to 1.76%.
The downgrades may also have an impact on the eurozone's rescue fund.
The European Financial Stability Facility (EFSF) - which has already been used to rescue Portugal and the Irish Republic - is guaranteed by the eurozone governments.
The fund is supposed to contribute towards future bailouts of Greece.
It was already having trouble borrowing money needed to provide its rescue loans. S&P's announcement may make that task even harder.