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The agency slashed its rating by three notches to B1 from Ba1 and warned it may cut it again if the government's commitment to austerity wanes or international creditors become less willing to support it - Greece was saved from bankruptcy last May after accepting a €110bn bailout from the EU and the International Monetary Fund.
The Greek government's response Monday was quick and critical. It said Moody's downgrade was "completely unjustified" and "does not reflect an objective and balanced assessment" of Greece's actual economic prospects.
"Ultimately, Moody's downgrading of Greece's debt reveals more about the misaligned incentives and the lack of accountability of credit rating agencies than the genuine state or prospects of the Greek economy," the finance ministry said.
It said the agencies - rivals Standard & Poor's and Fitch Ratings have also downgraded Greece heavily in past months - were trying to make up for failing to predict the 2008 global financial crisis.
"Having completely missed the build-up of risk that led to the global financial crisis in 2008, the rating agencies are now competing with each other to be the first to identify risks that will lead to the next crisis," the ministry said.
In explaining its downgrade, Moody's warned that the Greek government's economic program may not yield the intended drop in debt and return to growth, and noted Greece's considerable difficulties in raising revenues. It also highlighted the risk of tougher debt conditions when the EU-IMF bailout package ends in 2013.
"The risk of a post-2013 restructuring might lead the Greek authorities and investors to participate in a voluntary distressed exchange before that time," Moody's Investor Services said.
The Greek finance ministry queried the timing and the size of the downgrade, describing them as "incomprehensible" in the wake of the government's success in cutting its budget deficit by 6 percentage points in 2010 to around 9 percent of the country's national income. The government has also pledged to bring the deficit to the EU limit of 3% by 2014.
Despite the progress, Greek national debt is still expected to exceed 150% of GDP this year, while the economy is forecast to contract 3%.
The finance ministry said the reduction in the budget deficit was the "strongest evidence that relative to last year the risk of sovereign default has not increased but rather decreased as Greece is on a bold path towards fiscal consolidation."
It said Moody's failed to properly take into account the positive impact from the austerity measures and structural reforms.
"At a time when the global economy is fragile and market sentiment is sensitive, unbalanced and unjustified rating decisions such as Moody's today can initiate damaging self-fulfilling prophecies and certainly strengthen the arguments for tighter regulation of the rating agencies themselves," it added.
Credit ratings agencies have been blamed for failing to properly identify risks in the global economy ahead of the financial crisis, which led to the deepest recession since World War II and a crisis of confidence in bloated government finances, particularly in Europe.
Some experts argue the agencies have now gone too far the other way - playing it safe by being excessively pessimistic - and market regulators are planning reforms to better supervise them.
The EU has been one of the agencies' most vocal critics and is looking at ways of reducing market reliance on their ratings, including greater competition among agencies and alternative ways to fund ratings.
On Monday, it played down the downgrade and insisted it would have no impact on its own view of Greece's public finances, which are made regularly to verify the implementation of the international bailout deal.
"We have our own assessments of what is going on," said Amelia Torres, spokeswoman of the EU Commission. "This is the assessment, as far as we are concerned, that you should look at and we don't react to rating agency announcements."
Standard & Poor's and Fitch rate Greece slightly higher at BB+ though S&P has recently warned that it may lower its view soon.
Whether Greece ends up restructuring its debts - effectively reducing the amount it pays to creditors - could hinge on whether it can get the support of investors in bond markets.
Thanks to its bailout, Greece doesn't have to raise any substantial sums soon. However, Greece is trying to keep a presence in the markets and is due to auction €1.25bn worth of 26-week treasury bills Tuesday.
At the moment, it's effectively blocked from issuing longer-term debt because of the exorbitantly high costs involved. The interest rates markets are charging Greece to lend money for 10 years is over 12%, nearly 9 percentage points more than what Germany has to pay even though they share the same currency.
Although Monday was a national holiday in Greece, bonds were trading in international markets - the benchmark 10-year bond yield for Greece spiked 0.07 of a percentage point to 12.32%.
