The US rating agency said mounting political turmoil and the difficulties faced by President Dilma Rousseff's government in tackling growing debt was behind the decision.
Brazil was awarded an investment-grade rating by S&P in April 2008, when the country's economy was on the rise.
However, sliding commodity prices and austerity have created a recession.
Ms Rousseff's left-wing government had imposed austerity measures in a bid to avoid such a downgrade.
S&P downgraded Brazil - Latin America's largest economy - sooner than had been expected.
The move - a major setback for Finance Minister Joaquim Levy's attempts to shore up public finances - is likely to rock the Brazilian stock market on Thursday.
S&P cut Brazil's rating from BBB-minus to BB-plus, which denotes substantial credit risk.
The outlook on the new rating remains negative, which means further downgrades could soon follow.
