Credit rating agency Standard & Poor's downgraded the United States' credit rating late Friday for the first time in the history of the ratings.
The credit rating agency said that it is cutting the country's top AAA rating by one notch to AA-plus.
President Obama has said a rating cut may hurt the broader economy by increasing consumer borrowing costs tied to Treasury rates.
The credit agency said that it is making the move because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country's debt situation.
"The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the [Obama] administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics," S&P said in a statement.
A source familiar with the discussions said that the Obama administration feels the S&P's analysis contained "deep and fundamental flaws."
Bloomberg News reported Friday night that a Treasury spokesman said the S&P decision contains a $2 trillion error.
The spokesman, who asked not to be identified by name, said the S&P error speaks for itself.
S&P said that in addition to the downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years.
It said such a downgrade to AA would occur if the agency sees less reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period.
In April, S&P warned the government that a downgrade was possible unless Congress and the administration came up with a credible long-term deficit reduction plan and avoided a default on the country's debt.
After months of wrangling and negotiations with the administration, Congress this week passed an 11th-hour debt reduction package that averted a possible default.
Moody's Investors Service and Fitch Ratings affirmed their AAA credit ratings Tuesday, the day Obama signed the bill that ended the debt-ceiling impasse that pushed the Treasury to the edge of default.
Moody's and Fitch also said that downgrades were possible if lawmakers fail to enact debt reduction measures and the economy weakens.
The measure raised the nation's debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years.
S&P put the U.S. government on notice on April 18 that it risks losing its AAA rating unless lawmakers agree on a plan by 2013 to reduce budget deficits and the national debt. S&P indicated last month that anything less than $4 trillion in cuts would jeopardize the rating.
"A grand bargain of that nature would signal the seriousness of policymakers to address the fiscal situation in the U.S.," John Chambers, chairman of S&P's sovereign rating committee, said in a video interview distributed by the ratings firm on July 28.
Mohamed el-Erian, chief executive and co-chief investment officer at Pacific Investment Management Co., said in a Bloomberg Television interview before the announcement: "The minute you start downgrading away from AAA, you take small steps toward credit risk and that is something any country would like to avoid."