WASHINGTON (Reuters) - A federal judge on Thursday dismissed two key parts of the U.S. Justice Department's landmark lawsuit seeking to recover billions of dollars spent by the federal government on smoking-related illnesses, but allowed two remaining rac

U.S. District Judge Gladys Kessler ruled in a written opinion that the government could not use the Medical Care Recovery Act, or a second law involving Medicare Secondary Payor insurance provisions as a basis to try to recover government expenses related to sick smokers. But she did rule the Justice Department could proceed with its two counts under the federal racketeering law to seek to force the tobacco firms to give up their ``ill-gotten'' profits obtained through fraud and deceit since the 1950s. The ruling was a partial setback for the Justice Department, which had argued the entire case seeking to recover much of the $20 billion spent by the federal government every year on smoking-related illnesses should be allowed to proceed to trial. Among those named in the suit were Philip Morris Cos. Inc., R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp., British-American Tobacco Plc, Loews Corp.'s Lorillard Tobacco Co. Inc., Vector Group Ltd.'s Liggett Group Inc., the Council for Tobacco Research U.S.A. Inc. and the Tobacco Institute Inc. The tobacco industry had argued the whole case should be dismissed. Tobacco Stocks Higher Tobacco stocks closed higher. The American Stock Exchange's Tobacco index, with nine tobacco-related issues, rose 4.2 percent. The Standard & Poor's Tobacco index also climbed a similar 4.3 percent. The lawsuit was filed in Sept. 1999 and announced at a Justice Department. news conference by Attorney General Janet Reno. President Clinton, who announced plans to bring the lawsuit in his State of the Union address to Congress in January last year, emphasized the part of the ruling that sided with the government. ``This remains a very important opportunity for the American people to have their day in court against big tobacco and its marketing practices,'' Clinton told reporters as he met with his Cabinet. ``I urge Congress to provide the funding to allow the lawsuit to move forward and not to shield the tobacco industry from the consequences of its actions,'' he said. Kessler was appointed as a federal judge by Clinton. Republican presidential candidate George W. Bush has raised questions about the lawsuit. While dismissing two central parts of the government's case, Kessler said a significant part of it, involving the racketeering law, may proceed. ``In sum, while the government's theories of liability have been limited, the extent of the defendants' potential liability remains, in the estimation of both parties, in the billions of dollars,'' she wrote. But Kessler expressed reservations about whether the racketeering claims would ultimately prove successful. ``Based on the sweeping nature of the government's allegations and the fact the parties have barely begun discovery to test the validity of these allegations, it would be premature for the court to rule (now),'' Kessler wrote. ``At a very minimum the government has stated a claim for injunctive relief: whether the government can prove it remains to be seen.'' Liggett had argued it could not be sued under the racketeering provision because it broke with the other companies four years ago, settled with five states and agreed to help the states pursue the other companies. Kessler rejected that argument. Case Against British-American Tobacco Dismissed Kessler did dismiss the claims against British-American Tobacco for lack of jurisdiction over the foreign company. William Ohlemeyer, Philip Morris vice president and associate general counsel, said, ``We believe this is an important first step in the ultimate dismissal of the case.'' He said the world's largest tobacco company ``will continue to vigorously defend the case and to challenge the government's claims at the next appropriate opportunity.'' Assistant Attorney General David Ogden said he was ''pleased'' the Justice Department, ``can go forward with this important case.'' In a written statement that made no mention of the two dismissed counts, he added: ``We look forward to proceeding to trial and holding the tobacco companies accountable for the fraudulent conduct alleged in this lawsuit.'' A Justice Department spokeswoman said no decision had been made on whether to ask Kessler for permission to appeal the part of her ruling that went against the government.

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