The European Union executive is threatening to suspend Sri Lanka's special trading rights because of its failure to respect human rights.

An EU investigation into Sri Lanka's human rights situation showed "significant shortcomings," EU spokesman Lutz Guellner said Tuesday in Brussels.

Sri Lanka's commitment to human rights is linked to trade incentives on nearly $2 billion worth of goods it exports to the EU — the world's largest consumer market.

The European Commission said it would ask the EU's 27 member nations whether it should suspend trade privileges that allow Sri Lanka to pay less to export clothing and fish to Europe. Based on 2008 figures, losing trade preferences Would cost Sri Lanka $81 million, it said.

Human rights groups have urged Sri Lanka to free nearly 300,00 minority Tamil war refugees from military-run camps before monsoon rains create serious health problems.

The refugees were forced into the camps earlier this year after fleeing the final months of the government's war with the Tamil Tiger rebels.

Meanwhile, Human Rights Watch also slammed Sri Lanka's government Tuesday for the slow pace at which it is releasing refugees from military-run camps.

The government earlier this year said it would release 80 per cent of them by the end of the year, but later halved that number and said all would be released by the end of January.

With files from The Associated Press