The credit ratings agency announced earlier this week that it was assigning Ireland an AA- ranking â the fourth-highest investment grade on its scale.
Standard and Poor's made the assessment on the basis of the rising cost of supporting the nation's banking sector, reports the Guardian.
It said the government's cumulative spend on propping up the banking industry has increased to around â¬90 billion ($114 billion), with recapitalization costs up to â¬50 billion from an originally forecast of â¬35 billion.
But the National Treasury Management Agency (NTMA) has hit back at the decision, stating that Standard and Poor's made the downgrade after using inaccurate calculations.
"In terms of the specific analysis by Standard and Poor's, this is largely predicated upon an extreme estimate of bank recapitalization costs of up to â¬50 billion," said a statement from the NTMA.
"We believe this approach is flawed."
Trevor Cullinan, a credit analyst for Standard and Poor's, defended the reasons behind the assessment.
"The downgrade reflects our opinion that the rising budgetary cost of supporting the Irish financial sector will further weaken the government's fiscal flexibility over the medium term," he stated.
Ireland's net general government debt is forecast by the organisation to hit 113 per cent by 2012, a figure above that of similarly-rated nations such as Belgium (98 per cent) and Spain (65 per cent).
The agency warned that a further downgrade could take place if the cost to the government of supporting the financial sector goes up any further, or there are any other "adverse economic developments".
Earlier this week, Olli Rehn, the EU commissioner for economic and monetary affairs, told Bloomberg that European banks may face more frequent stress tests following the success of the round of examinations conducted on financial institutions in the region last month.
By Tony Aynsley