together by the EU and the International Monetary Fund. Portugal is widely regarded as the next country in need of a bailout as it struggles to refinance its debts while still in recession.

Deutsche Bank credit analysts said: "There seems to be an increasing view from EU leaders that the need for a complete overhaul of the current rescue framework is no longer required. For us, this is increasingly leaving the peripheral situation as a potential macro shock in the months ahead."

EU leaders fear offering a bailout to Portugal will leave Spain exposed as it is wrestling with massive bank debts.

The Greek prime minister, George Papandreou, called an emergency meeting of his cabinet last night in a desperate attempt to calm the situation. He was particularly upset that Moody'sgave a negative outlook on fears that Athen's fiscal adjustment programme was overly ambitious.

The ratings agency warned that its debt grade could be slashed further if the government's commitment to austerity measures and reforms, demanded in exchange for its €110bn (£95bn) bailout waned. The country's failure to crack down on rampant tax evasion was also criticised.

"The negative outlook on the B1 rating reflects Moody's view that the country's very large debt burden and the significant implementation risks in its structural reform package both skew risks to the downside," the agency said.

Tomorrow's planned sale of six-month government T-bills, following the downgrade, will be seen as a "crash test" for the eurozone member on capital markets.

Papandreou, who convened the surprise cabinet meeting despite a public holiday in Greece, is believed