* Up to 10 banks, 3 financial institutions downgraded
* Terna, Snam, Atlantia cut, Eni dropped to A3
* Outlook negative on banks
By Philip Baillie
MILAN, July 16 (Reuters) - Moody's cut the credit ratings of a string of Italian banks on Monday, bringing the country's top lenders in line with a downgrade to Italy's sovereign rating last week, as well as lowering ratings for companies and local government authorities.
Two of Italy's largest banks including Intesa SanPaolo and Unicredit were downgraded to Baa2 from A3 with a negative outlook, matchi ng the country's sovereign rating lowered on Friday to two notches above junk status.
The downgrades include a drop of one notch to seven financial institutions and two notches for six others.
"Along with the increase in the risk of sovereign bond defaults, the downgrade of Italy's long-term ratings to Baa2 also indicates a similarly increased risk that the government might be unable to provide financial support to its banks in financial distress," the ratings agency said in a statement.
State lenders Cassa Depositi e Prestiti and Ismea, were also downgraded because of high levels of exposure to the domestic market.
Italian banks have come under pressure in recent weeks because of a spreading debt crisis and are seen as vulnerable because of their vast holdings in Italian government bonds.
The agency said Italy's long-term resolve to push through much-needed reforms and persistent worries about Spain and Greece were increasing its liquidity risks.
Moody's also cut ratings for major utility companies.
Terna, the Rome-based national electricity operator was cut to Baa1, and infrastructure group Atlantia, gas operator Snam <SRG.MI and energy and water services group Acea also had their ratings lowered.
The country's biggest postal service Posta Italiane saw its rating dropped to Baa2, while energy giant Eni was lowered one notch to A3 from A2.
Moody's cut 23 local government authorities including Lombardy, Lazio, as well as the cities of Milan and Naples.
Moody's also said it put Italian defence giant Finmeccanica on review.
Italian Prime Minister and technocrat Mario Monti said last week he did not rule out tapping euro zone bailout funds through a new bond-buying system to help ease Italy's borrowing costs.
But Moody's said an Italian request for external assistance could trigger a further downgrade.