DUBAI, May 14 (Reuters) - Moody's Investors Service cut its debt ratings for Saudi Arabia, Oman and Bahrain on Saturday while assigning negative outlooks to three neighbouring states, as low oil prices continue to undermine government finances in the region.

The rating agency downgraded Saudi Arabia's long-term issuer rating by one notch to A1 but gave the kingdom a stable outlook, saying sweeping economic reforms announced by the government last month might stabilise the state budget.

In late April, Deputy Crown Prince Mohammed bin Salman revealed Saudi Arabia's biggest policy shake-up in decades, including tax rises, an efficiency drive and plans to give a bigger role to the private sector.

"The government has ambitious and comprehensive plans to diversify both the economy and its balance sheet which, if even partly successful, should stabilise its credit profile and which could, if achieved, offer a route back to a higher rating level over time," Moody's said.

However, the agency said it was still uncertain how Saudi Arabia would fund a massive budget deficit averaging 9.5 percent of gross domestic product between 2016 and 2020, which would require total financing of $324 billion.

"It is not yet clear how this cumulative financing need will be met: while Saudi Arabia's low levels of government debt at 5.8 percent of GDP in 2015 provide fiscal space, no medium-term funding strategy has yet been announced," Moody's said.

The agency downgraded Oman by one notch to Baa1 with a stable outlook, and cut Bahrain by one notch to Ba2, deeper in junk territory, with a negative outlook. Both countries lack the huge financial and oil reserves of their wealthy neighbours.

While Bahrain can expect support from its ally Saudi Arabia in a crisis, it is likely to find it increasingly hard to borrow in the international markets, particularly since it will be competing for money with its neighbours, Moody's said.

"The further deterioration in the government's balance sheet, combined with increased external debt issuance from other countries in the region, will lower the supply of external funding, thereby heightening the risk that finance is obtainable only at much less affordable rates for Bahrain, or potentially reduced amounts."

Moody's also confirmed the Aa2 ratings of the United Arab Emirates and its biggest member, Abu Dhabi, but assigned a negative outlook to them.

The UAE has been more proactive than its neighbours in restraining spending and reforming its finances in an environment of low oil prices, but Moody's said the government's policies to cut its budget deficit were still not clear.

Moody confirmed the Aa2 ratings of Kuwait and Qatar but gave both of them a negative outlook.

(Reporting by Andrew Torchia; Editing by Andrew Heavens) ((andrew.torchia@thomsonreuters.com; +9715 6681 7277; Reuters Messaging: andrew.torchia.thomsonreuters.com@reuters.net))

Keywords: MIDEAST RATINGS/OIL