The Greek bond markets saw one of their biggest one-day falls of the year on Thursday as shaken investors warned that the country faced the growing threat of a ratings downgrade.

In spite of signals that Greece was planning new austerity measures, government two-year bond yields, which have an inverse relationship with prices, rose nearly a percentage point as a second ratings agency warned of a downgrade.

Pierre Cailleteau, chief economist for sovereign debt at Moody’s, said Greece could see its long-term credit ratings cut two notches, following a similar statement from Standard & Poor’s 24 hours earlier, knocking any optimism from hopes of more budget reduction measures.

Greece is planning new austerity measures of up to €3.6bn ($5bn, £3bn), perhaps as early as next week, to ensure it cuts the 2010 budget deficit to 8.7 per cent of gross domestic product, according to an official familiar with the situation. But after political consultations the final package might be smaller, the official added.

Hopes that Greece could raise new debt in the capital markets this week have almost certainly been scuppered by the worsening mood in the markets, which also saw the euro weaken to a year low against the yen and a near-nine month low against the dollar.

Gary Jenkins, head of fixed income research at Evolution, said: “It has got to the point where something has to happen. Either the Greeks come out with big budget cuts or the EU makes clear its plans to help them fund their debt.”

Greece has committed itself to reduce its budget deficit by 4 percentage points this year but EU officials have warned that the country needs to take tougher action to meet the target.

“Prime Minister George Papandreou announced additional tax hikes and cuts in spending earlier in February worth about 0.5 percentage points of GDP, so if additional measures up to 1.5 per cent of GDP [about €3.6bn] are taken, it should be enough, perhaps reducing the budget deficit by more than 4 points,” said the official.

He stressed that no final decision had been taken and the size of the package may be subject to change.

There is widespread speculation in the Greek market that the package might be finalised when Olli Rehn, European commissioner for economic and monetary affairs, visits Athens on Monday, and after the visit this week of European Union and International Monetary Fund monitors.

The monitors thought some of the assumptions underpinning Greece’s austerity plans were too optimistic and suggested that more measures were needed, according to officials involved in the visit.

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