Meanwhile, the spread on Greek bonds surged to as high as 2.25pc.

The Irish spread remains the highest in the EU, other than for Greece.

Spreads also rose yesterday, however, for Britain, Italy, Portugal and Spain.

For Portugal they reached 0.65pc, and for Spain 0.61pc.

"I think it's a wake up call again with Greece and it shows the fragility of the bond markets," said Alan McQuaid, the chief economist at Bloxham Stockbrokers.

He added that it was a reminder that finance minister Brian Lenihan could not afford to shy away from the promised expenditure cuts in today's budget.

"If he tried to raise taxes instead," said McQuaid, "he'd pay a heavy price from the bond markets."

Mr Lenihan has himself argued that, without severe budget cuts, not only will interest rates rise, but the country might not be able to find lenders to supply the amounts of money it needs.

With the national debt of Greece now just three notches above "junk" grade, there may be even worse to come for it.

Fitch has warned that its outlook for the country's debt is negative because of the prospects for public finances.

It has cited "the weak credibility of fiscal institutions and the policy framework", adding that these were "exacerbated by uncertainty over the prospects for a balanced and sustained economic recovery".

The Fitch downgrading was the second blow to the credibility of Greek debt.

Standard and Poor's had earlier put Greek debt under "negative" watch and warned of a downgrading if the government did not attack its overspending.

Frankfurt-Trust Investment, Smith and Williamson Investment Management and Pictet Asset Management, which manage a combined USD 100 billion of Greek sovereign debt, said they were not ready to buy even after yesterday's biggest tumble in two-year notes since 1998.

"I'd still be wary of catching a falling knife," said Robin Marshall, who helps manage about USD 20 billion of assets as director of fixed income at Smith and Williamson in London.

He sold his Greek bond holdings in early 2008.

Yields on two-year Greek government notes jumped 66 basis points to 2.72 percent yesterday. Ten- year yields climbed 21 basis points, or 0.21 percentage point, to 5.34 percent, and 30-year yields advanced 17 basis points to 5.96 percent as bond prices fell.

Greece's economy shrank 1.7 percent in the third quarter, and the budget deficit is 12.7 percent of gross domestic product. The socialist government of Prime Minister George Papandreou has said it plans to cut the budget deficit to 9.1 percent of GDP next year.

Greek Finance Minister George Papaconstantinou said in Athens yesterday the government will "do all that's needed" to bring it down, including submitting a supplementary budget if necessary.