* Trade preferences worth over $100 million at risk
* Sri Lanka does not fulfil criteria, sources say
* Major EU importers, retailers concerned
(Adds Sri Lanka reaction)
By Darren Ennis
BRUSSELS, Oct 16 (Reuters) - A European Union investigation has found Sri Lanka in breach of international human rights laws, meaning it is likely to lose concessions worth over $100 million for its top exports to Europe, EU sources said.
Brussels is expected to publish on Monday the findings of the investigation 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 evidence is very clear that Sri Lanka does not fulfil the basic human rights conditions of GSP plus," one EU source said on Friday, in reference to the system of preferential tariffs for the world's poorest countries.
"I think the EU has leaked this deliberately. The motivation of the leak is to undermine Sri Lanka. The concession is a total process of economics, but the process is hijacked by politics. There is a political motive," said Rajiva Wijesinghe, secretary of ministry for human rights and disaster management.
Brussels has consistently warned Sri Lanka it must meet 27 international human rights conventions to retain its Generalised System of Preference Plus trade scheme.
"GSP plus is not an instrument used for short-term political crisis, but is meant to provide long-term stability," a European Commission official said.
"This is not a trade sanction. There are rules for GSP plus and if you break the rules, then unfortunately there are consequences. They will keep basic GSP either way."
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.
Last year, the government said it would neither cooperate with the European Union's investigation nor allow investigators to come to the island nation.
EU sources said its report showed evidence of police violence, torture and breaches of labour laws, notably the use of underage children.
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.
"It is unfortunate for the Sri Lankan government that GSP plus is so cut-and-dried. You either meet the requirements or you don't. There is no discussion, no negotiation about it," a Colombo-based diplomat from a developing nation told Reuters on condition of anonymity.
TEXTILES
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.
Suspending the preferential tariffs -- which can go as low as zero -- would hit Sri Lanka's textile industry hard.
Garments netted the country a record $3.47 billion from EU markets last year, and were its top source of foreign exchange, followed by remittances of $3 billion and tea exports of $1.2 billion.
Sri Lanka has seen an investment boom since the end of the war, with its stock market -- traditionally one of the world's most volatile -- up 108 percent so far this year, the second best performing in the world after Peru's. [ID:nCOL436132]
It took advantage of this to sell its second $500 million internationally traded bond this week to strong international demand, while ratings agency Standard and Poor's upped its outlook to positive from stable on a stronger balance of payments picture and $2.6 billion IMF loan.
Many fear the loss of the EU trade terms would force big job cuts in Sri Lanka.
Major European importers, notably large British retailers such as Marks & Spencer, are concerned about possible increases in the cost of importing from one of their major hubs in the midst of the worst economic downturn in decades.
Monday's report will be discussed by the EU's executive European Commission -- which oversees trade policy for the 27-nation bloc -- who must then decide by the end of November whether to propose to member states that they temporarily suspend Sri Lanka's GSP plus status.
Any decision would take effect six months from the vote by EU member states.
"It would most likely take effect around June next year," a Commission official said. (Additional reporting by Peter Apps in London; editing by Dale Hudson and Andrew Roche)