NEW YORK, Jan 12 (Reuters) - A record $3.5 trillion of U.S. corporate debt was downgraded by Moody's Investors Service in 2008 as the global financial crisis undermined corporate America's credit quality, the rating agency said on Monday.

About 81 percent of the downgrades, or $2.8 trillion, came from the financial sector as the housing slump and credit crunch took a heavy toll on banks' balance sheets.

Industrial companies had about $644 billion of debt downgraded and utilities about $23 billion.

"With a severe slump in global demand and exorbitant spikes in borrowing costs, it has become an extreme challenge for a firm in any industry to reduce leverage and grow profits," Moody's economist Ben Garber said in a report.

Moody's also put a record $2.9 trillion of corporate debt on review for downgrade, much of it in the financial sector, suggesting that more ratings erosion may loom this year.

"With a prolonged recession on view, it is expected that the assets sitting on financial institution balance sheets will continue to deteriorate in value as the crisis spreads through consumer credit, led by increased joblessness and home price deflation," Moody's said.

The wave of downgrade reviews and the amount of debt involved also indicates many defaults are likely in 2009, Moody's said. (Reporting by Dena Aubin; Editing by Leslie Adler)