Sri Lanka faces loss of EU trade perks over rights

* Trade preferences worth over $100 million at risk

* Sri Lanka does not meet rights criteria, sources say

* Major EU importers, retailers concerned

By Darren Ennis

BRUSSELS, Oct 19 (Reuters) - A European Union investigation has found Sri Lanka in breach of international human rights laws and EU sources said the country is likely to lose concessions worth more than $100 million for its top exports to Europe.

The EU on Monday published the findings of the investigation it launched a year ago into allegations of human rights violations and torture in the 25-year war between the Sri Lankan government and Tamil Tiger rebels.

"The report comes to the conclusion that Sri Lanka is in breach of its commitments. We will now prepare for a legal proposal to remove the additional trade preferences which may enter into force mid-next year," a spokesman for the EU's executive Commission said.

EU sources said the report showed evidence of police violence, torture and breaches of labour laws, notably the use of underage children.

"The evidence is very clear that Sri Lanka does not fulfil the basic human rights conditions of GSP Plus," one EU source said, in reference to a system of preferential tariffs -- sometimes as low as zero -- for the world's poorest countries.

Brussels has consistently warned Sri Lanka that it must meet 27 international human rights conventions to retain its Generalised System of Preference Plus trade scheme. Suspending the preferential tariffs would hit Sri Lanka's textile industry hard and many fear big job cuts as a result.

In 2008, the European Union was Sri Lanka's largest export market, accounting for 36 percent of all exports, followed by the United States with 24 percent. Garments earned the country a record $3.47 billion from EU markets and were its top source of foreign exchange, followed by remittances of $3 billion and tea exports of $1.2 billion.

The Commission will discuss Monday's report and decide by the end of November whether to propose to EU member states that they temporarily suspend Sri Lanka's GSP Plus status. A decision would likely take effect around June next year, six months from a vote by member states, a Commission official said.

Major European importers, notably large British retailers such as Marks & Spencer (MKS.L), are concerned about possible increases in the cost of buying from one of their major suppliers amid the worst economic downturn in decades.

Colombo came under heavy pressure from Western nations, including those in Europe with large Tamil populations, because of civilian deaths in the final phase of the war against the Tigers, which ended with the separatists' defeat in May.

The Sri Lankan government has repeatedly accused European countries with large and vocal Tamil populations of pandering to pro-Tamil Tiger viewpoints in exchange for electoral support. Last year, it said it would neither cooperate with the EU investigation nor allow investigators to visit the island.

Rajiva Wijesinghe, Colombo's secretary of ministry for human rights and disaster management, last week criticised a leak of the report as an attempt to undermine Sri Lanka. "The (trade) concession is a total process of economics, but the process is hijacked by politics. There is a political motive," he said.

(Reporting by Darren Ennis and David Brunnstrom, editing by Mark Trevelyan)