Fitch Rating gave the tropical Indian Ocean republic a BB-minus rating, used to describe a speculative investment, but with a long-term stable outlook.

Another agency hired by Sri Lanka for a credit classification, Standard and Poor's, gave a lower B+ sovereign rating for Sri Lanka, President Mahinda Rajapakse said.

Although both are often regarded as "junk bond ratings," the president said it was a respectable begining for the island.

"This places us at a respectable beginning with the universe of rated sovereigns," the president told parliament. "These positive developments will be further consolidated."

Standard and Poor's said any significant delay in fiscal adjustments and reforms in the public sector or a serious deterioration in the security situation, would exert downward pressure on the ratings.

"The ratings also incorporate the high level of government indebtedness and weak revenue mobilization, together with political and security concerns, which stem from a fractious political environment and the unresolved issue of a peace settlement with Tamil separatists," Standard and Poor's said.

Analysts said a B+ rating from Standard and Poor's fell into the "highly speculative grade" despite taking into account the country's so far reliable debt repayment track record.

The government had also commissioned Moody's for a rating, but their classification was not published as widely expected by markets here.

Financial analysts said the government will want to use the rating to help raise around 500 million dollars through an international bond issue next year for reconstruction.

Despite a long-running conflict with Tiger rebels, "Sri Lanka has proved resilient to adverse shocks over a long period of time, its institutions are strong and it has an unblemished debt service record," Fitch Ratings said.

The island is also seeking to recover from last December's tsunami that killed 31,000 people and displaced nearly a million.

The main constraints on the rating were the island's "fragile security situation and weak public finances," the agency said.

"Peace and politics hold the key to Sri Lanka's future," senior Fitch director Paul Rawkins said in a statement.

The government has said it is banking on continued peace to boost growth and help pay for subsidies.

An end to a ceasefire between security forces and the Tamil Tiger rebels would put "downward pressure" on Sri Lanka's rating.

"The absence of an enduring peace continues to hang over the country, intruding into the everyday business of government and the longer-term commitment to economic reform," Fitch said.

It added that weak coalition governments and public debt concerns have weighed down Sri Lanka's 20-billion-dollar economy which relies heavily on remittances from overseas workers and exports of garments and tea.

The rating should assist the government in sell bonds abroad as it provides investors with a means to assess the country's creditworthiness.

The awarding of the rating came against the backdrop of escalating violence in the northeast and heightened fears that Sri Lanka could slip back into civil war.

Channa Amaratunga, economist and chief investment officer of Boston Asset Management in Colombo, welcomed the ratings announcement.

"This is good," he said. "The key thing now is how Sri Lanka plans to use its rating to tap international markets and raise cheaper funds to ease the pressure on the local debt market.

"If you look at our expenditure, the bulk of it is spent on interest costs to service local debt. This will ease the pressure and perhaps allow top Sri Lankan corporates to tap the international market for funds as well."

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