MILAN (Reuters) -An Italian subsidiary of French luxury giant LVMH that makes Dior-branded handbags was placed under court administration on Monday, after a probe alleged it had sub-contracted work to Chinese firms that mistreated workers.

This is the third such decision this year by the Milan court in charge of pre-emptive measures, which in April appointed a commissioner to run a company owned by fashion group Giorgio Armani for "culpably failing" to adequately oversee its suppliers.

The investigations come amid increased consumer and investor scrutiny of luxury goods companies' supply chains. To reduce reputation risks in recent years fashion labels have curbed the number of sub-contractors and internalised production, hurting for example the Tuscan leather goods industry.

Italy is home to thousands of small manufacturers that cover 50-55% of the global production of luxury clothing and leather goods, consultancy Bain calculated.

The Milan court ordered Manufacturers Dior SRL be placed under judicial administration for one year, a copy of the ruling seen by Reuters showed. The company will continue to operate during the period.

The Dior investigation focused on four Chinese suppliers employing 32 workers, two of whom were illegal immigrants while another seven worked without the required documentation.

The staff lived and worked "in hygiene and health conditions that are below the minimum required by an ethical approach," the document said.

A representative for LVMH had no immediate comment. Shares in LVMH fell on news of the court's decision to hit a session low.

Dior is LVMH's second largest fashion label. Christian Dior SE is a separate, listed holding company controlled by France's Arnault family, which holds a 42% stake in LVMH.

24 HOURS A DAY

In the 34-page ruling, the judges said the workers were made to sleep in the workplace in order to have "manpower available 24 hours a day".

Data mapping electricity consumption showed "seamless day-night production cycles, including during the holidays."

In addition, safety devices had been removed from the machinery to allow them to operate faster, according to the document.

This allowed contractors to rein in costs and charge Dior as little as 53 euros to supply a handbag, the document said, citing as an example the Dior PO312YKY model, which the fashion house then retailed in shops at 2,600 euros.

The Dior unit did not adopt "appropriate measures to check the actual working conditions or the technical capabilities of the contracting companies," it added.

The owners of the contracting and subcontracting companies are under investigation by Milan prosecutors for exploiting workers and employing people off the books, while Dior itself faces no criminal probe.

The Armani probe also unveiled that suppliers of the Italian fashion brand included Chinese manufacturers that violated worker protection laws. Armani Group said at the time it had always sought to "minimise abuses in the supply chain."

(Reporting by Emilio Parodi, writing by Valentina Za, editing by Gavin Jones and Ros Russell)

By Emilio Parodi