By C. Bryson Hull

COLOMBO, Sept 29 (Reuters) - The European Union is likely to let Sri Lanka keep a trade concession crucial to its apparel industry, while recommending it be revoked if the country does not improve its human rights record, diplomats said on Tuesday 29 September. The European Commission by mid-October is due to decide whether to recommend the Indian Ocean island nation retain the Generalised System of Preferences Plus (GSP Plus) trade concession, which would then be voted upon by the EU Council.

"It is likely to be extended with a negative recommendation," a diplomat briefed on the EU's internal discussions told Reuters on condition of anonymity. "There would then be some targets for Sri Lanka to meet."

GSP Plus gives Sri Lanka the right to export more than 7,200 products duty-free to the EU, which last year accounted for 36 percent of Sri Lanka's $8.1 billion in total exports.

Lat year, Sri Lanka's garment and textile industry earned $3.5 billion in total, 43 percent of which came from EU markets.

The EU decision will be the culmination of a year-long rights probe launched in October, when the government was fighting to crush the separatist Liberation Tigers of Tamil Eelam (LTTE) and win a 25-year war. Sri Lanka declared total victory in mid-May.

The government refused to cooperate with the probe or let the EU-contracted investigators enter the country, and said doing so was tantamount to betraying its sovereignty.

Since July 2008, the EU has warned Sri Lanka may not meet the human rights standards required to retain GSP Plus, mainly because of allegations security forces either carried out or failed to crack down on abductions and killings during the war.

Sri Lanka has been wary of criticism from Western nations, particularly those with large Tamil populations that supported the LTTE, and flatly rejected any interference or criticism as it battled to finish off the Tigers over the past year.

SIGNS OF GOODWILL

The EU mission in Sri Lanka declined to comment on the GSP Plus, saying it was confidential. Countries receiving GSP Plus must have ratified and implemented 27 international conventions on rights, labour, development and good governance.

Two other diplomats with knowledge of the discussions told Reuters a conditional extension would be the likely outcome.

"We hope the government will take a few little steps to help us find an intermediate solution," one of those diplomats said. "We see a few signs of goodwill, but they see everything in terms of war -- it is either winning or giving up."

Sri Lanka's former export development and international trade secretary, S. Ranugge, earlier this month said a negative report compiled by independent rights exports hired by the EU almost certainly meant the loss of the trade scheme. [ID:nCOL492385]

Since Ranugge made his prediction, he has been removed from his post and President Mahinda Rajapaksa has appointed a four-minister team to lobby the European Union.

Garment makers have pressed the government to fight to keep the preference, and say losing the scheme would force big job cuts from a workforce of a million, mostly from poor rural areas.

Sri Lanka is banking on an economic renaissance after the end of a war that has kept its $40 billion economy from full performance for decades, and has secured a $2.6 billion International Monetary Fund loan it hopes will support that.

(Editing by Sanjeev Miglani)