Moody's on Friday left Italy's sovereign debt rating at Baa3, one notch above junk, but upgraded the outlook to stable from negative, in an unexpected boost for Prime Minister Giorgia Meloni's government.

Most analysts had expected the agency to leave both Italy's rating and outlook unchanged.

Moody's had put the euro zone's third-largest economy on a negative outlook in August last year following a government collapse and in the midst of an energy crisis.

"The decision to change the outlook to stable from negative reflects a stabilisation of prospects for the country's economic strength, the health of its banking sector and the government's debt dynamics," Moody's said.

Moody's was the fourth agency to review Italy in the last month. S&P Global, DBRS and Fitch all left their ratings and outlooks unchanged.

Economy Minister Giancarlo Giorgetti welcomed the announcement.

"It's a confirmation that despite many difficulties we are working well for the future of Italy," he said in a statement.

"So in the light of the judgment expressed by Moody's and the other rating agencies, we hope that the prudent, responsible and serious budget policies of the government...will be confirmed by parliament," he added.

The government's budget for 2024 is currently going through the Italian parliament.

The Italian economy stagnated in the third quarter compared with the previous three months, preliminary data showed last month, after contracting by 0.4% between April and June. Analysts forecast that activity will remain weak in the coming quarters.

The European Commission forecast on Wednesday that Italy's debt, proportionally the second-highest in the euro zone, would rise marginally from a projected 140% of national output this year to 141% in 2025.

The gap between yields on Italian 10-year bonds and their German equivalent is significantly wider than the spread of any other euro zone country versus Germany. It has however narrowed to below 1.75 percentage points (175 basis points) from a recent peak of 209 basis points on Oct. 9.

(Reporting by Saikeerthi in Bengaluru, and Gavin Jones and Keith Weir; Editing by Shounak Dasgupta and Rosalba O'Brien)