Importers in Sweden, Australia, Germany, Belgium and Italy, in messages to the Pakistan Carpet Manufacturers and Exporters Association (PCMEA), have scrapped orders worth $10m (£6m), and more cancellations are expected.
The PCMEA on Sunday demanded a high-level independent judicial inquiry into the murder, and urged Amnesty International, the United Nations Children's Fund and the International Labour Organisation (ILO) to join the proposed inquest.
The industry faces a likely loss of another $100m in the next few months if the impression that a "carpet mafia" was behind the shooting of Iqbal Masih persists.
The 12-year-old boy, who toiled six years in a carpet factory after his impoverished mother sold his services, was murdered on 16 April.
He had gained fame after speaking out overseas against bonded child labour in Pakistan. The Bonded Labour Liberation Front (BLLF), a non-government organisation, blamed the "carpet mafia" for the murder.
But local police claimed he was killed by a drug addict over a petty quarrel. The gunman, identified as Ashraf Hero, was arrested a week after the boy's death.
The ILO, in its 1993 report, said Pakistan had an estimated 7.5 million child labourers, of whom half a million toiled in the carpet sector.
Imran Malik, the chairman of PCMEA, said "a propaganda campaign unleashed by our rivals, particularly Indian exporters" had inflicted the "worst blow" to the industry.
"The minds of our consumers have been so much poisoned that a carpet, traditionally a gift, has now become a sign of slavery."
Carpets made in Pakistan had been earning $500m annually, but the exports declined to $240m in recent years, Mr Malik said, blaming a "vilification campaign" by BLLF and the Indian lobby.
The Pakistan government has denied that the boy's murder was linked to his crusade against child labour.Reuse content