When the rusty, old supertanker Lara 1 reached Bangladesh two weeks ago, the captain stoked up its engines for the last time and rammed it as far up the beach at Chittagong as possible. The 70-metre tall, 400-metre long iron colossus now squats in the mud in the Rising Steel ship breaking yard, waiting to be picked over by an army of young men risking their lives for little more than £1 a day.

The Lara 1 is one of the largest corpses in the world's biggest graveyard of ships. A half-dismembered bulk carrier lies on one side, the remains of a European car ferry on the other.

Beyond it, stretched along 12 miles of what just a decade ago was a pristine sandy beach, ore carriers, container ships, gas tankers, cruise liners and cargo ships of every size and description are being dismantled by hand in 140 similar yards. Every year more than 250 redundant ships, many from Britain and Europe, come here to be broken up.

It will take gangs of oxyacetylene cutters nearly six months to dismember the 42,000-tonne Lara 1. In the first week, say its owners, oils, toxic sludges and other waste will be pumped out, parts of the bow and some bulkheads will be removed and the recycling will start. The cable, the steel, the generators, funnels, propellers, lifeboats, companionways, sinks, toilets, even the lightbulbs and every nut and bolt of the Lara 1 will be sold on the Bangladesh market, to be turned into construction materials, girders, metal sheets and furniture. The sheet metal will be used for riverboats and coastal craft.

"Every bit of this ship will be recycled, reused and resold. Nothing will go to waste. This ship will help build Bangladesh. We dismantle 2.5m tonnes of steel a year from Chittagong, but we need four million tonnes to keep growing," says Hefazatur Rahman, chairman of the Mostafa group of industries, which paid $20m to buy the Lara 1 for scrap, and could make $10m profit if world steel prices rise in the next year. Or, he says, he could lose everything if they fall, as they did in 2008.

But now, in a move that India, Bangladesh and other developing countries with major shipbreaking industries say could wreck local economies, the EU has proposed laws stating that ships registered in Europe should be broken up only in licensed yards meeting strict new environmental guidelines. It estimates that up to 1.3m tonnes of toxic materials on board end-of-life vessels are sent each year to Chittagong and other shipbreaking yards in south Asia from the EU alone, with "incalculable" risks to workers.

Under the system, outlined last month in Brussels, European ships will have to remove toxic wastes before they are exported, and ship recycling yards will have to meet strict environmental and safety requirements. European ships will be recycled only in the best yards.

Few yards in Bangladesh or India, the world's two largest centres of shipbreaking, can expect to pass the proposed standards without massive investment. Figures are hard to verify but, say local Chittagong watchdogs, in the past 10 years hundreds of men working in the 70 breaking yards have died or been maimed or poisoned. Many are from the poorest communities in the country.

Location of Chittagong in Bangladesh.

"On average, one worker dies in the yards a week and every day a worker is injured. It seems like nobody really cares. Workers are easily replaceable to the yard owners: if one is lost they know another 10 are waiting to replace him. The government collects the taxes and turns a blind eye," says Muhammed Shahin, an officer with local watchdog group Young Power in Social Action.

"Explosions of leftover gas and fumes in the tanks are the prime cause of accidents in the yards," he says. Other accidents are caused by falls – because the men are not given safety harnesses – or workers being crushed by falling beams or plates, or electrocuted.

Last week the Exxon Valdez, the ship responsible in 1989 for one of the largest oil spills in US history, was sold for scrap and is expected to be broken up on a beach in India or Bangladesh.

"It is outrageous that this ship, which has already created one environmental catastrophe, is being allowed to kill and pollute yet again," said Jim Puckett, executive director of the Basel Action Network, which works to prevent the globalisation of the toxic chemical crisis. "The ship's owner must be held accountable for simply selling this toxic time- bomb and then walking away."

According to the YPSA, most workers wear no protective gear and many work barefoot. "There is hardly any testing system for the use of cranes, lifting machinery or a motorised pulley. The yards re-use ropes and chains recovered from the broken ships without testing their strength. Fires, gas explosions, falling steel plates, exposure to poisons from bunker oil, lubricants, paints and cargo slop have left thousands with respiratory diseases," says Shahin.

But the breakers insist that safety conditions have improved. "We have changed. It is much safer now. It's quite different," says Nazmul Islam, secretary of the Bangladesh Ship Breakers Association. "We are installing modern equipment and are guided by international law. We have built a 150-bed hospital for workers. The supreme court in Bangladesh has given us new directives, and we have incinerators and separators. Compared with just three years ago, it's much better. We now have storage facilities for asbestos."

But the EU environment commissioner, Janez Potocnik, is not convinced. "Although the ship recycling sector has improved its practices, many facilities continue to operate under conditions that are dangerous and damaging. This proposal aims to ensure that our old ships are recycled in a way that respects the health of workers as well as the environment. It is a clear signal to invest urgently in upgrading recycling facilities," he says.

What is certain is that shipbreaking has become essential to Bangladesh's breakneck industrial growth. Apart from providing nearly half the steel the country of 160 million people uses a year, the government collects £70m in revenue from an industry that employs more than 20,000 people directly and as many indirectly.