The move by Moody's, the New York credit rating agency, means that only a handful of banks are still ranked in the financial world's premier league of creditworthiness and two of them - Union Bank of Switzerland and Dresdner Bank - are under review for a downgrade.
Analysts in London said the Deutsche downgrade was a fitting end to a dreadful year for the bank.
Deutsche will end up with a bill for more than pounds 400m for the fiasco at Morgan Grenfell where Peter Young, a former star fund manager, broke rules laid down by City regulators.
Mr Young, under investigation by the Serious Fraud Office, set up a web of Luxembourg holding companies to hide the extent of his investments in high technology stocks. Deutsche is compensating 90,000 investors in three affected funds.
Moody's cut Deutsche's long-term debt, counterparty and deposit ratings from triple A to Aa1.
The agency confirmed the bank's Prime-1 rating for short-term deposits and commercial paper but cut the long-term rating and counterparty rating of Morgan Grenfell & Co to Aa2 from Aa1.
Deutsche played down the significance of the downgrade. "We are convinced that the new evaluation will not lead to a lasting rise in refinancing costs," said a spokesman.
But the bank's shares slipped in the last few minutes of trade on the Frankfurt stock exchange to close at DM70.59, down DM0.56.
Linda Montag, senior analyst at Moody's, said the Morgan Grenfell scandal was not the direct reason for the downgrade.
"But [it's] one of the examples of the risks of the bank's global expansion," she said.
The changing dynamics of Germany's fragmented banking market and fierce competition in global markets in which the bank was expanding, such as investment banking, added uncertainty to the bank's fundamentals, Ms Montag said.
However, Moody's still believes Deutsche is "one of the world's strongest and better managed financial institutions".