OTTAWA - Canada's tobacco companies are planning legal action to stop the federal government from implementing labelling regulations on cigarette packages, sources said.

The tobacco companies intend to ask a Montreal court for a stay in the labelling regulations, perhaps as early as today, an industry source said. The new regulations call for warning labels to be 50% of the size of a standard cigarette package. The legal action is a prelude to the companies challenging aspects of the government's new tobacco bill in court in the continuing legal battle between the industry and the government. The expected legal move in Canada comes after a U.S. federal judge threw out a $1-billion Canadian government lawsuit against tobacco giant J.T.I.-Macdonald Corp. Yesterday, the federal government said it is studying the ruling by Judge Thomas McAvoy to determine its next legal step. Canada can appeal the ruling. "It's important that we do everything possible to have the case go forward," said a spokesman for Allan Rock, the Health Minister. A spokesman for the tobacco company said the U.S. ruling is comprehensive in rejecting the federal government's case. "We're quite pleased with the judgment. It's not a sheer technical dismissal ... it's fairly substantial," said Guy Côté, J.T.I.-Macdonald Corp. vice-president. "In layman's terms, the judge said that Canada is trying to use the U.S. court to settle a tax dispute and this is not the appropriate forum." Mr. Côté said the company remains uncertain about the government's next step. "They could choose to go this route [an appeal of the U.S. court ruling]. Some people say they could decide to repatriate the whole thing and do it here in Canada." The lawsuit -- believed to be the largest launched by Ottawa -- was dismissed on the grounds that U.S. courts do not have the jurisdiction to enforce foreign tax policy. Canada launched the suit against R.J.R.-Macdonald , as the company was then known, last December. The federal government said R.J.R.-Macdonald and related companies were involved in an extensive smuggling operation, shipping cigarettes to the U.S. and then bringing them back into Canada to sell tax-free. The smuggling -- the federal government said that two billion cigarettes were illegally imported into Canada during 1991 to 1994 -- brought about the end of Ottawa's tax-based policy to inhibit smoking. Heavy taxes imposed by the federal government during that period were rolled back because of the smuggling. Ottawa said it lost more than $1-billion in tax revenue during the period. Keith Martin, the Canadian Alliance health critic, urged Ottawa to drop the American lawsuit and pursue a vigourous anti-tobacco campaign based on higher taxes. The government has spent more than US$4-million on legal fees in hiring a high-powered American law firm to prosecute the case thrown out this week. "It will be very difficult to pursue and win this and very expensive for the taxpayer," Mr. Martin said. However, Judy Wasylycia-Leis, New Democrat health critic, urged the government to appeal. "Having spent this much and put this much effort into the case ... I think they have to register an appeal immediately," she said. Ms. Wasylycia-Leis said the federal government should be preparing a case against the tobacco companies for prosecution in Canadian courts to recover the health care costs associated with treating the effects of smoking.

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