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Exchange traded funds tied to Italian stocks and bonds could see action Tuesday after Standard & Poor’s cut its credit rating on Italy to A/A-1.

“In our view, Italy’s economic growth prospects are weakening and we expect that Italy’s fragile governing coalition and policy differences within parliament will continue to limit the government’s ability to respond decisively to domestic and external macroeconomic challenges,” S&P said in a statement.

European stocks shook off the Italian downgrade, however, and ETFs listed in the U.S. indexed to the region were set for a higher open Tuesday on easing concerns over Greece and expectations of further stimulus from the Federal Reserve.

The iShares MSCI Italy (NYSEARCA:EWI) is down about 30% over the past three months as European equities have been rocked by the credit crisis.

Talks between Greece’s finance minister and European Union and International Monetary Fund officials are set to continue Tuesday evening, Reuters reported.

U.S. stock ETFs were poised to rise Tuesday following the previous session’s loss on hopes the Fed may announce ‘Operation Twist’ at its meeting this week. There are expectations the central bank may sell short-term government bills and buy long-term government bonds in an attempt reduce long-term Treasury rates.

Italian government bond yields rose in the wake of the S&P downgrade. PowerShares DB 3x Italian Treasury Bond Futures ETN (NYSEARCA:ITLT) and PowerShares DB Italian Treasury Bond Futures ETN (NYSEARCA:ITLY) are exchange traded notes in this category.

iShares MSCI Italy ETF (EWI)

click to enlarge

italy-etf-ewi

PowerShares DB 3x Italian Treasury Bond Futures ETN (ITLT)

italy-bond-etn-itlt

Disclosure: None

Source: Italy Stock, Bond ETFs In Focus On S&P Ratings Downgrade