Tobacco giant Philip Morris

is threatening to sue the Australian government for possibly billions of dollars over its plan to be the first country to introduce plain, brand-less packaging for cigarettes.

The tobacco firm is fearful that plain-packaging will damage its cigarette brands like Marlboro and Alpine and reduce their ability to compete against other brands.

The Australian government argues that reducing brand identification will make smoking less attractive and in turn reduce smoking rates and the health costs associated with smoking, which is said by Australian health authorities to kill 15,000 people a year in the country.

The fight over cigarette packaging is being closely watched by other tobacco firms and governments, with New Zealand, Canada and Britain among countries considering similar laws.

Analysts also say plain packaging would hit tobacco firms in emerging markets where they are seeking to lure smokers away from cheap brands to more expensive ones and, if widespread, could lead to takeovers in the industry to cut costs.

Philip Morris Asia said on Monday it had served a notice of legal claim on the government under Australia's bilateral investment treaty with Hong Kong, which holds the government responsible to protect Hong Kong investments in Australia.

The notice sets a mandatory three-month period for the two sides to negotiate an outcome. If there is no agreement, Philip Morris Asia said it would seek compensation.

Failing that, we aim to go ahead with a compensation claim for the loss to our business in Australia that would result from plain packaging, said Philip Morris Asia spokeswoman, Anne Edwards.

Compensation would be decided under United Nations trade rules.

It will be up to the panel that will operate under the United Nations international trade rules to look at which evaluation method they would use determine the loss to our business, said Edwards.

We estimate it may be in the billions (of dollars), but ultimately it will be up to this panel to decide.

Edwards told Reuters that Philip Morris could not be more specific about compensation because it was still calculating the value of its brands in Australia.

Prime Minister Julia Gillard said on Monday she would go ahead with the new packaging laws, which are expected by January 2012.

We're not going to be intimidated by Big Tobacco's tactics, whether they're political tactics, whether they're public affairs kind of tactics out in the community or whether they're legal tactics, Gillard said.

We're not taking a backward step. We've made the right decision and we'll see it through, she said.

The legal action is not expected to delay the new laws. It may take months to even be heard, said law professor Donald Rothwell from the Australian National University.

NANNY STATE

The tobacco industry has been running TV advertisements against the plain packaging laws, asking Australians do they want to live in a nanny state.

British American Tobacco , whose brands include Winfield, Dunhill and Benson & Hedges, has said the government's plans would infringe upon international trademark and intellectual property laws and has also raised the possibility of pursuing legal action.

The tobacco industry is watching this with obvious interest and it's aiming to put as much pressure on as many states as possible who are thinking of pursuing this type of action, said Jurgen Kurtz, director of international investment law at the University of Melbourne.

The new laws would restrict tobacco industry logos, brand imagery, colors and promotional text appearing on packs, with the only distinguishing marks being the brand and product name in a standard text and color.

Olive green packaging had been decided upon because research showed smokers found it the least attractive color.

Philip Morris said it had manufactured and sold cigarettes in Australia since 1954 and built up well-known brands such as Marlboro, Alpine and Longbeach.

It said plain packaging would rob Philip Morris of its ability to use these brands to differentiate its brands from those of its competitors, effectively turning tobacco products into a commodity.

Analysts say that if plain packaging succeeds in commoditizing the tobacco industry, it could raise pressure for takeovers to cut costs.

Smoking-related illnesses kill more than 15,000 Australians each year and cost the economy A$31.5 billion in health costs, according to Australian government health authorities. Smoking is the largest preventable cause of disease and death.

Australia already bans all outdoor and media advertising of cigarettes and cigarette packets are covered with graphic photographs of the affects of cancer.

Australia's tobacco market generated total revenues of A$9.98 billion ($10.4 billion) in 2009, up from A$8.3 billion in 2008, although smoking generally has been in decline.

($1 = 0.953 Australian dollars)

(Additional reporting by Sonali Paul in MELBOURNE; Editing by Ed Davies and Matt Driskill)

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