George Osborne insisted Britain would not "run away" from its problems after Moody's downgraded the country's AAA credit rating.
The Chancellor said the coalition was determined to stick by its plan for economic recovery after the rating was lowered by a notch to AA1.
The credit rating agency warned that "subdued" growth prospects and a "high and rising debt burden" were weighing on the economy.
Shadow chancellor Ed Balls called the downgrade "a humiliating blow" to the Prime Minister and Chancellor, who he said "must urgently take action to kick-start our flatlining economy".
But Mr Osborne said the loss of the gold-plated status did not mean the Government should change course.
"We have a stark reminder of the debt problems facing our country - and the clearest possible warning to anyone who thinks we can run away from dealing with those problems," he said. "Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it. We will go on delivering the plan that has cut the deficit by a quarter, and given us record low interest rates and record numbers of jobs."
Mr Osborne continued: "As the rating agency says, Britain faces huge challenges at home from the debts built up over many, many years, and it is made no easier by the very weak economic situation in Europe. Crucially for families and businesses, they say that 'the UK's creditworthiness remains extremely high' thanks in part to a 'strong track record of fiscal consolidation' and our 'political will'.
"They also make it absolutely clear that they could downgrade the UK's credit rating further in the event of 'reduced political commitment to fiscal consolidation'. We are not going to run away from our problems, we are going to overcome them."
The downgrade is a major blow for Mr Osborne, who has been coming under increasing pressure to take action to stimulate the economy. The Chancellor has used maintaining the top credit rating for Government bonds as one of the key arguments for the Government's austerity programme. However, Labour has insisted that withdrawing demand from the economy has put it more at risk by stunting growth.
The statement from Moody's highlights the problems the weak medium-term economic outlook poses for deficit reduction plans. It now expects the "period of sluggish growth" to "extend into the second half of the decade".