By Matt Spetalnick, Jason Szep and Antoni Slodkowski

WASHINGTON/YANGON (Reuters) - The United States has decided to place Myanmar on its global list of worst offenders in human trafficking, officials said, a move aimed at prodding the country’s new democratically elected government and its still-powerful military to do more to curb the use of child soldiers and forced labor.

The reprimand of Myanmar comes despite U.S. efforts to court the strategically important country to help counteract China’s rise in the region and build a Southeast Asian bulwark against Beijing’s territorial assertiveness in the South China Sea.

Myanmar’s demotion, part of the State Department’s closely watched annual Trafficking in Persons (TIP) report due to be released on Thursday, also appears intended to send a message of U.S. concern about continued widespread persecution of the Rohingya Muslim minority in the Buddhist-majority nation.

The country’s new leader, democracy icon Aung San Suu Kyi, has been criticized internationally for neglecting the Rohingya issue since her administration took office this year.

   Washington has faced a complex balancing act over Myanmar, a former military dictatorship that has emerged from decades of international isolation since launching sweeping political changes in 2011.

President Barack Obama’s diplomatic opening to Myanmar is widely seen as a key foreign policy achievement as he enters his final seven months in office, but even as he has eased some sanctions he has kept others in place to maintain leverage for further reforms.

At the same time, Washington wants to keep Myanmar from slipping back into China’s orbit at a time when U.S. officials are trying to forge a unified regional front.

The U.S. decision to drop Myanmar to “Tier 3,” the lowest grade, putting it alongside countries like Iran, North Korea and Syria, was confirmed by a U.S. official in Washington and a Bangkok-based official from an international organization informed of the move. Another person familiar with the matter said: “I’m not going to turn you away from this conclusion.” All spoke on condition of anonymity.

A Tier 3 rating can trigger sanctions limiting access to U.S. and international aid. But U.S. presidents frequently waive such action.

The decision on Myanmar, formerly known as Burma, was one of the most hotly contested in this year’s report, and followed concerns that some assessments in last year’s human trafficking report were watered down for political reasons.

There was intense internal debate between senior U.S. diplomats who wanted to reward Myanmar for progress on political reforms and U.S. human rights experts who argued that not enough was being done to curb human trafficking, the U.S. official said.

A Reuters investigation published last August found that senior diplomats repeatedly overruled the State Department’s anti-trafficking unit and inflated the grades of 14 strategically important countries. The State Department denied any political considerations but U.S. lawmakers called for reforms in the decision-making process.

This year’s decision on Myanmar marked a win for the State Department’s Office to Monitor and Combat Trafficking in Persons, which was set up to independently grade countries’ efforts to prevent modern slavery, such as the illegal trade in humans for forced labor or prostitution.

    Because Myanmar had been on the so-called “Tier 2 Watch List” for the maximum four years permitted by law, the State Department either had to justify an upgrade or else automatically downgrade it. A Tier 3 ranking means that anti-trafficking efforts do not meet “minimum standards” and it is “not making significant efforts to do so.”

State Department spokesman John Kirby said: “We will not comment on the contents of this year’s report until after the report is released.”

Republican U.S. Representative Chris Smith, a leading lawmaker on human rights, said "Burma's downgrade, if true, is justified and long overdue -- the government was warned for the past four years that such an action was possible."

CHILD SOLDIERS

Deliberations on Myanmar’s record focused heavily on efforts to halt the military's recruitment and use of child soldiers as well as forced labor, especially the coercion of local villagers to perform some work. Such practices have been documented by international human rights groups and are also outlined in last year's State Department report.

A key issue that the U.S. administration considered before Myanmar’s downgrade was alleged government complicity in human trafficking, including its failure to prosecute any civilian officials for their involvement in it, according to the person familiar with the situation. While the Myanmar military is credited with significant progress toward curbing the use of child soldiers, such as allowing international inspections of military bases, there was no indication the problem had been completely eradicated as the U.S. anti-trafficking office had urged, the source said.Human rights groups had lobbied U.S. Secretary of State John Kerry against upgrading Myanmar, saying it would be unearned.

    The diplomatic blow to Myanmar’s government could be softened by the fact that the TIP report covered efforts during the year ending in March, under the previous administration of former junta general Thein Sein.

Suu Kyi, a Nobel Peace laureate, assumed her government role in April, after her party won the country’s first democratic elections in five decades.

But with the generals still controlling three security ministries and holding a lock on 25 percent of seats in parliament, U.S. officials grappled with whether a downgrade could undermine cooperation from the military against human trafficking.

For her part, Suu Kyi has recently unsettled U.S. officials by calling on them not to use the term “Rohingya” to refer to the Muslim minority in the country’s north. Many in Myanmar refer to them as "Bengalis," insinuating that they are stateless illegal immigrants.

The United States has urged Myanmar to treat them as citizens.

The 2015 TIP report highlighted that the government's denial of citizenship to an estimated 800,000 men, women and children in Myanmar -- the majority of them ethnic Rohingya -- "significantly increased this population's vulnerability to trafficking".

“The chronic, chronic abuse of the Rohingya has not been dealt with at all,” a U.S. congressional aide said, suggesting support on Capitol Hill for a downgrade this year.

(Additional reporting by Patricia Zengerle in Washington and Andrew R.C. Marshall in Bangkok; Writing by Matt Spetalnick; editing by Stuart Grudgings.)