Ratings agency Standard & Poor"s has downgraded Spain"s long-term sovereign debt rating to AA from AA+ as fears continue to grow over contagion effects from the Greek debt crisis.

S&P affirmed Spain"s credit outlook as negative, which implies that future downgrades could be in the pipeline. The country"s short-term sovereign credit rating was also affirmed at A-1+.

The agency said Spain faced a deeper deterioration in public finances and a longer period of economic weakness than it had previously expected. The news rattled European markets, which were already unsettled by Tuesday"s downgrade of both Greece and Portugal.

"We now believe that the Spanish economy"s shift from a credit-fueled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed," S&P credit analyst Marko Mrsnik said in a statement.

Spain is still in recession and the government has launched a massive public works program to keep unemployment down.

"Our conclusion is that challenging medium-term economic conditions will further pressure Spain"s public finances, and additional measures are likely to be needed to underpin the government"s fiscal consolidation strategy and planned program of structural reforms," S&P said.

Spanish private sector debt stands at 178% of gross domestic product, according to S&P, which is much higher than that of many of the country"s peers.

The agency said it also considered soaring unemployment, low export capacity, and a deterioration in the financial system"s asset quality as factors slowing the country"s economic recovery in the medium-term.