* Inquiry into rating agencies' downgrades of Italy
* S&P says claims are groundless
* Probe into S&P ended; Moody's, Fitch probes in final stage (Adds S&P statement, details, background)
By Sara Rossi and Antonella Ciancio
MILAN, June 5 (Reuters) - Prosecutors from a small town in southern Italy have probed Standard & Poor's headquarters in New York for alleged market manipulation as part of an investigation into the credit-rating agency's downgrades of Italy, a legal source said on Tuesday.
Prosecutors from the town of Trani have probed New York-based S&P under a law which holds companies liable for alleged crimes committed by their employees. The legal source said proceedings have not yet been formally notified to S&P as the prosecutors are first informing five S&P employees being probed.
Prosecutors are looking into a raft of downgrades by global credit agencies S&P, Fitch and Moody's for debt-laden Italy between 2010 and 2012 that triggered a sell-off of Italian assets and fuelled long-running criticism over rating agencies.
"We believe the reported claims are baseless and unsupported by any evidence. We will continue to defend vigorously our actions and the reputation of our company and people," S&P said in an emailed statement on Tuesday in Milan and New York.
A lawyer for S&P in Milan said the development in New York was a "formal step" as prosecutors wind up their investigation and notify proceedings to the people involved and their offices in Europe and New York.
Moody's has said it takes the dissemination of market-sensitive information very seriously and is cooperating with authorities. Fitch has not commented on the case.
A source close to the investigation said on May 31 that the prosecutors had completed a probe into five former and current S&P representatives and the branches where they were based.
The prosecutors are investigating whether crimes of market manipulation and abuse of privileged information were committed when the reports by the three agencies were released.
Under Italian law, when prosecutors complete a probe they notify their acts to the people and companies involved and can then seek a trial. A judge has to rule on any trial request.
S&P previously said none of its controlling shareholders had access to data or reports before the downgrade was made public and had rejected the prosecutors' allegations as groundless.
The prosecutors began their investigations last year after receiving a legal complaint from two consumer rights groups.
European policymakers complained the agencies had been too quick to downgrade indebted EU states despite bailouts and painful reforms to contain the euro zone debt crisis.
If the case goes to trial it may reshape the long-running debate over liability of credit agencies at a time of great uncertainty over the euro zone crisis.
Credit agencies have already come under fire for not predicting the subprime mortgage debt crisis of 2008-2009.
U.S. authorities criticised S&P for cutting the U.S. cherished triple-A rating last August.
Frustration in Italy mounted again last month when Moody's announced a mass downgrade of the country's banking sector. (Reporting by Sara Rossi; Editing by Emilio Parodi and James Dalgleish)