Moody's Investors Service downgraded 26 Italian banks Monday as they struggled with that nation's weak economy and with government austerity measures dampening demand for loans.

The firm said it based the new ratings on a number of criteria and separated the banks into four groups.

1. Two banks, UniCredit and Intesa Sanpaolo, together account for almost one-third of the Italian market. All their Moody's ratings remain at investment grade, and their assets are stronger, thanks to more solid, diversified business.

2. Next are six banks with ratings at the lower end of investment grade, "Baa3" or higher. They are better positioned than most of their peers to cope with the recession. This group includes the country's fifth-largest bank, Unione de Banche Italiane.

3. Seven banks with credit assessments at the high end of junk territory, "Ba1," face more significant challenges. This can include a combination of weak capital, insufficient internal capital and funding constraints.

4. The final group includes 11 banks with standalone credit assessments below "Ba1." They face more substantial challenges, often due to asset quality, capital or funding issues. This group includes the country's third-largest bank Bankca Monte Dei Paschi.