KUALA LUMPUR, July 1 (Reuters) - The U.S. State Department will downgrade Malaysia to the lowest ranking in its closely watched annual report on human trafficking to be released later on Thursday, two sources familiar with the matter told Reuters. Malaysia will fall to "Tier 3" after spending three years on the "Tier 2 Watchlist" in this year"s Trafficking in Persons (TIP) report, said the sources, who did not want to be identified as they were not authorised to talk to media. The U.S. embassy in Kuala Lumpur declined to comment ahead of the report launch later Thursday and the State Department could not be reached outside of regular business hours. Malaysia"s home ministry did not have an immediate comment.