SAN DIEGO (Reuters) - Animal rights activists released video on Thursday of farm workers in Argentina slashing lambs with knives, prompting outdoor clothing maker Patagonia Inc to apologize and launch an investigation into the practices of one of its suppliers.

The graphic four-minute video, published by People for the Ethical Treatment of Animals (PETA), was filmed in the Ovis 21 farm network, which provides merino wool used in Patagonia's base layers and insulation.

It shows cruel treatment of lambs and sheep, including castration and the docking of tails. Some lambs are stabbed in the neck with knives, and at least one is skinned while apparently still alive.

Patagonia, which highlights its commitment to sustainability and responsible sourcing, said in a statement the footage was "as disturbing as anything PETA puts out."

It also said it was "especially humbling" because the company had hoped to improve animal welfare by working with Ovis 21 on a new approach to grazing.

But it said it had not audited the network's animal-welfare practices, and had been unaware of the issues raised.

"We are investigating the practices shown. We will work with Ovis 21 to make needed corrections and improvements, and report back to our customers and the public on the steps we will take," Patagonia said in the statement.

"We apologize for the harm done in our name; we will keep you posted."

Warning: This video contains images some viewers may find extremely disturbing

The Ventura, California-based company said it respected, but did not share, PETA's belief that animals should not be used for any human purpose. PETA said all wool is the needless product of a cruel business.

"It's a pipe dream to think that wool can be mass-produced without causing animals to suffer," the animal rights group said.

Ovis 21 did not immediately respond to a request for comment.

(Reporting by Marty Graham; Editing by Daniel Wallis and Eric Walsh)