LONDON—European stocks erased earlier gains to trade lower Wednesday, as a downgrade of Portugal's long-term credit rating rattled investors' nerves ahead of the U.K. Budget statement.

Earlier gains were supported by hopes that the euro zone is close to reaching a compromise deal to help Greece, however, stocks fell and euro slipped to its lowest point of the day against the dollar after Fitch Ratings downgraded its rating and outlook on Portugal. In addition an unexpected drop in euro-zone new factory orders indicated the economic recovery remains fragile.

Stocks extended losses after the decision by Fitch to cut its ratings on Portugal to AA- from AA. The move reminded investors that other euro-zone countries are also feeling the strain from ugly debt burdens, adding more pressure to equities.

However, "unlike Greece, Portugal does not need to regain credibility and may allow growth to become more sustainable before acting aggressively on the fiscal front," said BNP Paribas.