The US has suspended trade privileges for Bangladesh until it improves workers' safety conditions in the clothing industry.
US Trade Representative Michael Froman pointed to several recent fatal accidents in its huge clothing sector.
These "had served to highlight some of the serious shortcomings in worker rights and workplace safety standards in Bangladesh", he said.
Two months ago, a factory collapse near Dhaka killed 1,129 people.
The collapse of the nine-storey complex, on 24 April, was Bangladesh's worst industrial disaster, and one of a series of accidents involving the world's second-biggest exporter of garments after China.
The garment industry employs some four million people in Bangladesh, 80% of them women.
The death toll from April's accident and others focused global attention on low safety standards in Bangladesh's garment factories and prompted the government in Dhaka to launch inspections of all plants to try to reassure Western retailers that safety conditions had improved.
Twelve people have so far been arrested over what happened, including the building's owner.
But unions and experts say hundreds of factories are still operating in shoddy buildings, raising fears that another tragedy could occur at any time.
President Obama's order suspends Bangladesh's duty-free trade privileges under the terms of a US trade programme called the Generalized System of Preferences (GSP), designed to promote economic growth in developing countries.
"The US government has worked closely with the government of Bangladesh to encourage the reforms needed to meet basic standards," said US Trade Representative Michael Froman.
"Despite our... clear, repeated expressions of concern, the US government has not seen sufficient progress towards those reforms", he added.
Thursday's announcement was the culmination of a year-long review of labour conditions in Bangladesh.
US Democratic lawmakers have been pushing for trade sanctions since April.
The action is thought unlikely to have an immediate economic impact, but it carries a reputational cost and might deter US companies from investing in the country, one of the world's poorest.
The sanction, which comes into effect in 60 days, might also sway a decision by the European Union on whether to withdraw GSP privileges.
EU action could have a much bigger impact, as its duty-free privileges specifically cover garments, which account for 60 percent of Bangladesh's exports to Europe.