SYDNEY (REUTERS) - Moody's Investors Service said Italy's inconclusive election outcome is credit negative because it raises the possibility of new elections, prolonging the country's political uncertainty.

"We would consider downgrading Italy's government debt rating in the event of additional material deterioration in the country's economic prospects or difficulties in implementing reform," Moody's said.

"A deterioration in funding conditions as a result of new, substantial domestic economic and financial shocks from the euro area debt crisis would also place downward pressure on Italy's rating."

Earlier, Standard & Poor's said Italy's recent election would not immediately affect the country's sovereign rating but could in the future.

Italy's inconclusive election is threatening prolonged instability and a renewal of the European financial crisis.

Moody's assigned Italy its current Baa2 rating and negative outlook in July 2012, which it said reflected its view that risks to implementing structural and fiscal reforms are substantial.