Europe's third and fourth biggest economies are in such a "weakened state" that the rates currently being charged by the alarmed bondmarkets are "unmanageable", the economists argued.
Without "urgent action", included heavy buying of sovereign bond by the European Central Bank, both countries could need a Greek-style international bail-out or may even have to quit the euro, they said.
"The European Central Bank will need to buy more government bonds, and we cannot rule out further liquidity injections into the banking sector," the Moody's economists said. "In the medium term, changes will be needed in the design, and possibly the membership, of the single-currency union."
Citigroup backed the view, warning that Spain will need a bail-out by the EU, ECB and International Monetary Fund within months. "Spain will need to enter some form of a Troika program" some time this year, Citi's economists said in a note.
The warnings in the report rattled traders across Europe. Spain's Ibex dropped 2.42pc, after a 4pc decline on Tuesday, plunging below the 7,000 level for the first time in three years. Italy's MIB fell 2.01pc; France's CAC fell 2.05pc; and Germany's DAX fell 0.9pc. In London, the FTSE 100 held firm.
The bondmarkets were initially cheered after Spain passed a key test and successfully raised €2.5bn at a debt auction. Madrid reached its sale targets but was forced to pay a far higher cost to shift its benchmark 10-year debt. The average yield was 5.7pc, compared with 5.4pc at the last auction.
In its report, Moody's Analytics, which is the economics arm of the rating agency, said "borrowing costs above 5.7pc will significantly raise the chance of default" for Spain.
The economists warned that although Italy's implied borrowing costs were lower than Spain's, Rome's threshold was lower.
"Italy is already out of fiscal space, in our estimate." said Moody's. "Its debt levels relative to GDP already exceed a manageable level. The manageable limit for Italian 10-year bond yields is estimated at 4.2pc. As of Wednesday, Italian 10-year yields were 5.46pc."
The economists said the problems were compounded by the advancing signs of recession and the inadequate political response.
"The eurozone economy is near a crossroads," said the report. "The region has slipped into a mild recession and sovereign debt crisis tensions are resurfacing. Policy missteps could deepen and prolong the downturn. European governments must continue to build firewalls around the region's highly indebted economies."
It added: "The eurozone has not put up sufficient funds to bail out either Italy or Spain if that becomes necessary."
Others argued that the its was becoming obvious that eurozone "sinner states" would not be able to stick to the German-led austerity programmes. Spanish prime minister Mariano Rajoy has pledged to reduced his country's budget deficit to 5.3pc.
Stephen Pope, economist at Spotlight Ideas, said: "It did not take long for the initial applause for the Spanish [bond] auction to turn into a haunting slow handclap. Rajoy has done as much as possible on the austerity front but in truth his supply side measures are less than popular in a nation saddled with crippling unemployment and their effect will not be realised until [the fourth quarter] 2012 at the earliest.
"The honest truth is ... Spain will fail to make 5.3pc as a deficit to GDP target this year. It will require aid and even if it is dressed up as a bank solvency plan, it will be another nation taking the bailout route. This is why the markets have turned ugly in Madrid."
Italy has already axed its 2012 economic growth outlook. Mario Monti, the technocrat prime minister struggling to impose radical austerity, said the economy would contract by 1.2pc not the 0.4pc shrink that forecast. Italy will also miss its 2013 target for a balanced budget, too.
Telegraph
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