(Adds context, analysis, details, other ratings)
* S&P cuts Saudi ratings by one notch
* Moody's, Fitch ratings remain higher
* Saudi says S&P's decision ignores its strengths
* But may feed into growing market unease about state finances
* Government hasn't yet released detailed plan to curb deficit
By Andrew Torchia
DUBAI, Oct 31 (Reuters) - Saudi Arabia criticised a decision by a leading credit rating agency to downgrade its debt, but it may struggle to reassure markets worried by the damage which low oil prices are doing to the kingdom's finances.
Standard & Poor's cut its ratings for Saudi Arabia's long-term foreign and local currency sovereign credit on Friday by one notch to 'A-plus/A-1', citing a "pronounced negative swing" in the government's budget balance.
S&P kept its outlook for the ratings negative, saying it could lower them further in the next two years unless the government managed a large and sustained cut in its deficit.
In a statement released by the official SPA news agency in the early hours of Saturday, the Saudi finance ministry said the downgrade was unjustified.
"We consider S&P's credit assessment reactionary, driven by fluid market factors rather than changes in the fundamentals of the sovereign," it said.
It added that the Saudi economy remained fundamentally strong and growing faster than similar economies, noting that the state's net assets exceeded 100 percent of gross domestic product and the country had large foreign exchange reserves.
The ministry also pointed out that the world's other two major rating agencies view Saudi Arabia more positively.
Moody's Investors Service has an Aa3 long-term issuer rating, one notch above S&P, with a stable outlook; Fitch Ratings has an AA rating, two notches above S&P, with a negative outlook.
Nevertheless, S&P's downgrade may feed into increasing concern about the ability of the world's top oil exporter to cope in the long term with an era of cheap oil.
The International Monetary Fund estimates the government is running an annual budget deficit of well over $100 billion and warned last week that the state's financial reserves would run out in under five years unless the government cut spending and raised non-oil revenues.
Reflecting such fears, the Saudi stock index is 14 percent lower than last year's close.
Five-year Saudi credit default swaps, used to insure against a debt default, are at their highest level since January 2012, when the region was grappling with the Arab Spring uprisings.
CDS prices suggest the risk of a sovereign debt default is higher for Saudi Arabia than it is for the Philippines - a stunning shift for the wealthy kingdom.
Net foreign assets at the Saudi central bank, which serves as the country's sovereign wealth fund, have dropped from a record $737 billion in August last year to $647 billion as the government liquidates assets to pay its bills.
The finance ministry's statement on Saturday said that "a thorough fiscal consolidation plan has been announced to ensure that existing buffers remain sufficiently large."
So far, however, the government has not released a clear, specific explanation of how it intends to bring the budget gap under control.
The finance minister has said the government is trimming expenses, but he gave no details, while the oil minister said last week that officials were studying whether to cut domestic energy price subsidies.
That could potentially save the government tens of billions of dollars annually, but it would be politically sensitive, and the oil minister did not elaborate. Investors hope more clarity may come with publication of the government's 2016 budget, expected by late December.
Even assuming spending and subsidy reforms, "we forecast that the government's net asset position will decrease to 79 percent of GDP in 2018," S&P said.
It added that any drop of the kingdom's liquid fiscal financial assets below 100 percent of GDP might trigger another downgrade. (Reporting by Andrew Torchia; Editing by Kim Coghill)