The international ratings agency Moody's warns it may downgrade Portugal's sovereign debt within three months, sparking a sell-off on the Lisbon stock market.
Moody's said it had placed Portugal's Aa2 government bond ratings "on review for possible downgrade" and warned it could be cut by up to two notches because of worsening public finances and weak growth prospects.
"The review of Portugal's ratings, which had been on negative outlook since October 2009. is expected to conclude within a three-month time horizon," Moody's said in a statement.
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The warning came one week after another international ratings agency, Standard & Poor's, downgraded Portugal's credit rating owing to similar concerns about fiscal and economic weaknesses.
"Today's rating action reflects the recent deterioration of Portugal's public finances as well as the economy's long-term growth challenges," Moody's said.
Following the Moody's warning, the Lisbon stock market sank by 2.30 per cent to 6,934.73 points, with the shares of 18 of 20 listed companies falling in the red.
A eurozone and International Monetary Fund decision to endorse a 110-billion-euro (145-billion-dollar) debt rescue package for Greece has failed to end concerns that the debt crisis in Athens could spread to other eurozone countries with high public deficits.
"Portugal's growth challenges plus large fiscal deficits have led market participants to compare Portugal (and several other European countries) to Greece," Moody's said.
"Although Moody's believes that Greece faces far more serious fiscal difficulties than Portugal, the rating agency nevertheless sees an extended period of retrenchment for Portugal as inevitable until the country's domestic financial imbalances are corrected," it said.
The European Commission said on that Portugal's public deficit could reach 8.5 per cent of output this year after reaching a record 9.4 percent last year.
The commission also raised its 2010 growth forecasts for the eurozone, with Portugal now expected to have growth of 0.5 per cent this year instead of 0.3 per cent.
The Socialist government has vowed to slash its public deficit to 8.3 per cent this year and then further in the coming years to fall under an EU-mandated three percent threshold by 2013.
Moody's said its review would look at factors related to public debt sustainability as well as the steps taken by the government "to address the poor economic competitiveness and low domestic savings, which are at the root of the country's low trend growth rate."
The agency added: "Moody's forecasts assume positive, albeit relatively slow, real economic growth."
"The review for possible downgrade will consider a repositioning of Portugal's ratings to reflect the potentially lasting deterioration in the government's debt metrics," said Anthony Thomas, vice president and senior analyst in Moody's Sovereign Risk Group.
"In the context of a small and slow-growing economy, such debt metrics may no longer be consistent with a Aa2 rating."
