By Rina Chandran

MUMBAI (Thomson Reuters Foundation) - A deadly attack by Islamist militants in Dhaka may stymie efforts by the Bangladeshi government and Western retailers to improve the rights and safety of garment workers, labor rights experts warned on Tuesday.

Gunmen stormed a restaurant in Dhaka's diplomatic zone on Friday, killing 20 people, most of them foreigners from Italy, Japan, India and the United States, in an assault claimed by Islamic State.

Bangladesh's $26 billion garment industry fears the attack could force major retailers from Uniqlo to Marks and Spencer and Gap to rethink their sourcing plans.

"It's a tipping point for the country and the garment industry," said Sarah Labowitz, co-director of the Center for Business and Human Rights at the NYU Stern School of Business in New York.

"The risk is that buyers will cut their reliance on the country, that they don't focus so much on worker standards there, which would be a setback for the industry," she said.

Bangladesh, which ranks behind only China as a supplier of clothes to Western countries, relies on apparel for more than 80 percent of its exports and about 4 million jobs.

Low wages and poor working conditions have long been a concern in Bangladesh's garment industry, which suffered one of the worst industrial accidents in 2013, when more than 1,000 people were killed in the collapse of the Rana Plaza complex.

The disaster prompted fashion retailers to work more closely together to protect workers and ensure the safety of buildings in the South Asian nation where garment workers can expect to earn a minimum monthly wage of $68, compared with $280 in China.

Two initiatives were set up to assess and help fund improvements to building and fire safety at thousands of garment factories in Bangladesh, including an accord signed by most European retailers.

There has also been legislation to ensure greater supply-chain transparency.

Despite the push for improved rights and safety for garment workers however, progress to implement change has been slow.

STALLED EFFORTS?

Labour rights campaign group Cividep India fears it will be even worse as the Bangladeshi government focuses on ensuring security in the country.

"It took a tragedy like Rana Plaza to prompt the government to take action, and while that effort won't stop, it may be stalled as the government has other priorities now," said Gopinath Parakuni, general-secretary of Cividep.

"Buyers too, may be weighing the risks of putting all their eggs in one basket," he told the Thomson Reuters Foundation.

While no major retailers have said they are pulling out or suspending operations following Friday's attack, Fast Retailing, the Japanese owner of the Uniqlo casual-wear brand, said it would suspend all but critical travel to the country..

Within the region, there is evidence that insecurity takes a toll on foreign investment.

Foreign direct investment (FDI) into Sri Lanka, another textiles hub, climbed after the end of a near three-decade-long civil war in 2009, data from the World Bank shows.

While in Pakistan, where garments make up almost a fifth of exports, FDI has fallen by more than half since 2008, when attacks increased.

At the same time, FDI in Bangladesh rose to $2.5 billion in 2014 from $448 million a decade earlier, data showed.

A fall in foreign investment may exacerbate the challenges in Bangladesh's garment industry, analysts said.

"Bangladesh is still very competitive, so we may not see a dramatic pullout," said Labowitz of the Center for Business and Human Rights.

"But there may perhaps be a slow trickle of buyers losing confidence and looking elsewhere," she said.

(Reporting by Rina Chandran, Editing by Katie Nguyen. Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers humanitarian news, women's rights, trafficking, corruption and climate change. Visit news.trust.org to see more stories.)