Ambac Financial Group Inc, a top insurer of bonds, lost its top level AAA financial strength rating on Friday, dealing a blow to its business which relies on the confidence of clients to gain new business.

Fitch Ratings cut the rating of three Ambac units to AA after the insurer said Thursday it would not follow through with a plan to raise $1 billion in equity capital to shore up its balance sheet.

The downgraded units include Ambac Assurance Corp., Ambac Assurance UK Ltd., and Connie Lee Insurance Co.

Fitch's said its determination reflects significant undertainty with respect to the company's franchise, business model and strategic direction.

With the downgrade, many of the securities tied to the company will likely also lose their top level ratings, according to Fitch. Ambac is also on negative credit watch for a possible further downgrade.

Such an outcome may result in investors writing down the value of their bonds. Merrill Lynch said on Thursday that it wrote down $3.1 billion in hedges bought from ACA Capital Holdings, a smaller competitor to Ambac.

Ambac also came under pressure this week from another ratings agency, Moody's Investor Services, to raise $1 billion in capital within six weeks or lose its rating.

The other big rating agency, Standard & Poor's, still maintains its top rating for Ambac but has placed it under review for a possible downgrade. Moody's is also reviewing MBIA, Inc, the largest bond insurer.

Ambac cited market conditions and the rating agencies' actions as reasons it opted forego its plant to raise additional capital. The company said raising equity capital is not an attractive option at this time as it continues to evaluate its alternatives.

Ambac's portfolio, which includes investments linked to the floundering mortgage market, had recently cut its dividend to investors by two-thirds, and wrote down $3.5 billion related to subprime mortgage securities.

The company's share price tumbled over the past year. Shares reached a peak of $96.08 in May but began dropping over the summer as the magnitude of the subprime crisis began to become apparent. In October, the company issued an earnings outlook below analysts' estimates, contributing to its decline.