The Senate Foreign Relations Committee, in a bipartisan study, said the United States should be firm on human rights concerns including treatment of journalists and said a "culture of fear and paranoia" had permeated Sri Lanka.
But the report worried the United States was alienating Sri Lanka as the island, historically friendly to Washington, boosts ties with China along with pariah states in Western eyes such as Iran and Myanmar.
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"The United States cannot afford to 'lose' Sri Lanka," the study said.
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"This does not mean changing the relationship overnight or ignoring the real concerns about Sri Lanka's political and humanitarian record," it said.
"It does mean, however, considering a new approach that increases US leverage vis-a-vis Sri Lanka by expanding the number of tools at our disposal," it said.
The report called for the expansion of US aid and a resumption of training to military personnel, during which the United States could seek progress on human rights.