Fitch Ratings downgraded BP , becoming the first agency to cut the oil major's credit rating and reversing its initial view that the financial impact of the Gulf of Mexico oil spill on BP would be limited.

The downgrade of BP's ratings reflects Fitch's opinion that risks to both BP's business and financial profile continue to increase following the Deepwater Horizon accident, Fitch said on Thursday.

The BP oil spill, which began in April is causing an ecological and economic catastrophe along the U.S. Gulf coast. Estimates for the total cost to BP range from $5.3 billion from Dutch bank ING to $37 billion from Credit Suisse.

Fitch in May admitted to a mistake when it assumed that the impact of the spill on BP's finances would be mitigated by insurance. However, Fitch said at the time the impact of the spill on BP's credit rating remained limited.

BP insures its own operations in the United States, rather than using commercial insurers, which means it is responsible for funding the clean-up.

But on Thursday the agency downgraded its rating on BP debt to AA from AA+ and attached a negative outlook, citing substantial additional risks including clean-up and legal costs.

Other factors that could lead to further downgrades include the oil well flow rate permanently increasing, the relief well being drilled by BP failing to completely arrest the oil flow and clean-up costs exceeding Fitch's worst-case scenario of around $5 billion in any one year, the agency added.

Reuters reported on Tuesday that a $23 billion slide in BP's market value and a surge in the cost of protecting its debt were due to fears oil could continue spewing into the sea for another two months at least and that BP's latest bid to stem the flow could make matters worse.

Five-year credit default (CDS) swaps on BP were about 30 basis points tighter on Thursday at around 230 basis points, easing after a second successive jump on Wednesday when the company's five-year CDS widened at one stage by 100 basis points to a record 270 basis points, according to Markit.

Among other credit rating agencies, Moody's has so far cut its outlook but said on May 7 that it was too early to assess whether the spill would affect the company's long-term credit rating.

Standard & Poor's, which on May 7 revised its outlook for BP to negative from stable, has said it is reviewing ratings on around 35 companies as a result of a temporary ban on deepwater drilling in the Gulf of Mexico.

SHARES EDGE HIGHER

Shares in BP gained as much as 4.7 percent on Thursday as a call with analysts planned for Friday gave hope there would be an update on the company's plans for its dividend which is seen to be threatened by the growing cost of the spill.

Two U.S. Senators said on Wednesday BP should cut its dividend until the full costs for the clean-up can be calculated.

The stock was up 4 percent at 446.83 pence by 1226 GMT, outperforming European peers <.SXEP>, up 2.9 percent and a 1.7 percent higher UK market <.FTSE>.

Maybe some people have decided that on a risk reward basis the value's there, said UBS analyst Jon Rigby, who added that most people's estimates of the cost of the spill is now hugely over-discounted in the stock.

(Additional reporting by Jane Merriman; Editing by Erica Billingham)

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