Sri Lanka has been condemned over its delay in freeing displaced Tamils
The European Union has decided to suspend Sri Lanka's preferential trade benefits because of concerns over the country's human rights record.
The Sri Lankan government has criticised the EU's decision.
It said it would intensify its efforts to engage in negotiations with Brussels to reverse the decision.
Sri Lanka's garments industry will be hit hardest, as it enjoys tax breaks to sell to retailers in Europe, a BBC correspondent reports from Colombo.
The EU decision is set to take effect in six months' time, to give Sri Lanka a chance to address the "shortcomings".
Besides garments, fisheries products are the most important Sri Lankan exports to the EU under the scheme, the European Commission says.
The temporary withdrawal of benefits follows a year-long investigation by the European Commission. It identified "significant shortcomings" in Sri Lanka's adherence to UN human rights conventions.
The foreign ministry said it will continue its dialogue with the commission but the discussions should be "sensitive" to the sovereign prerogative of the people of Sri Lanka.
It said that the setting of "unattainable targets and the shifting of goal posts" will only hamper the efforts of the two sides.
The EU's decision to temporarily withdraw preferential trade tariffs followed a year-long investigation, which found significant shortcomings in Sri Lanka's implementation of international human rights conventions.
It means that the trade benefits worth about $135m will be temporarily withdrawn in six months' time unless the EU's concerns are addressed.
The government is facing increasing international calls for an independent investigation into allegations of war crimes committed in the final stages of the war between security forces and Tamil Tiger rebels last year.
The UK government said it "fully supports the EU's decision" to remove trade preferences from Sri Lanka.
"Failure to implement core human rights conventions in the country is unacceptable and the European Commission's report into these failures made the decision a straightforward one," said Gareth Thomas, Minister of State in the Department for International Development.
"I hope the seriousness of this EU decision will encourage Sri Lanka to take necessary action to implement its human rights obligations," he said.
Meanwhile, defeated opposition presidential candidate Gen Sarath Fonseka has filed a petition in the Supreme Court challenging last month's election result.
His lawyers said the result should be annulled because of what they describe as vote rigging and other electoral malpractices.
Gen Fonseka is currently in military custody and is accused of plotting to overthrow the government. He denies the allegations.