The demotion came yesterday when the US State Department released its closely watched annual Trafficking in Persons report, which examines 188 governments' efforts in combating modern-day slavery.
It placed Myanmar alongside countries like Iran, North Korea and Syria, and says the Southeast Asian country has failed to meet "the minimum standards for the elimination of trafficking."
It also removed Thailand from the blacklist despite what the State Department described as widespread forced labor in the country's seafood industry.
Suu Kyi has been criticised for failing to address widespread persecution of the Rohingya Muslim minority in the Buddhist country.
Her government criticised the demotion as failing to recognise the country's progress.
"We are very sad that we have not been recognized for making positive changes," said presidential spokesman Zaw Htay. "In their report, they didn't mention the progress and development we have made for our country."
It also promised to step up efforts to combat trafficking measures. "The issue of human smuggling and trafficking will be addressed vigorously in close cooperation with international partners," it said.
President Barack Obama now has 90 days to determine whether to apply sanctions on so-called Tier 3 nations, including Myanmar. But the US often chooses not to, based on its national security interests.
Myanmar had faced a mandatory move up or down the rankings after four years on the watch list.
"Myanmar's downgrade is overdue," said Matthew Smith of Thailand-based advocacy group Fortify Rights. "The military has long been one of Southeast Asia's worst perpetrators of human trafficking."
There was disappointment in Yangon, Myanmar's commercial center, since the US action virtually precludes trade privileges that would help jumpstart economic growth after decades of ruinous military rule.
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