U.S. tobacco stocks got clobbered Wednesday after a Florida state appeals court refused to shelter U.S. tobacco companies from punitive damages in a landmark class action suit, exposing the industry to billions of dollars in potential claims.

Shares of three of the top four cigarette makers, Philip Morris Cos. Inc., RJR Tobacco Holdings Corp. and Loews Corp, plummeted to their lowest levels in more than a year. Philip Morris, the world's largest cigarette maker, saw its shares drop more than 13 percent, or 4-1/8, to 26-13/16, while RJR, the parent of the Camel brand maker, tumbled 3 points, or 12 percent, to 22-15/16. Stock in Loews, which controls 8 percent of the U.S. cigarette market though its Lorillard Tobacco Co, fell 2-1/8 to 67-7/8. American depositary receipts of British American Tobacco Plc, parent of No. 3 U.S. cigarette company Brown & Williamson Tobacco Co., fell 1/4 to 15-1/8, not far above their 52-week low of 14-1/2. The industry sell-off came against the backdrop of a wide-ranging rebound in the broader markets, as the Dow Jones industrial average gained 178 to 10384 and Nasdaq rose 97 to 2785. ``The decision is the worst possible outcome for the industry and was not expected today, so that is why stock are down,'' Bonnie Herzog of Credit Suisse First Boston said. The ruling knocked down arguments by the tobacco industry in the Engle vs RJ Reynolds class-action that potentially hundreds of billions of dollars in punitive damages be fixed through thousands of individual trials. It also sets the stage for a possibly massive award against beleaguered U.S. tobacco companies by year's end, analysts have said. ``The industry will appeal this decision to the entire appellate court, but that process will take time,'' Herzog added. ``So in the next few months, there is not a lot of positives for the industry and the stocks will be weak.'' The follow-up trial, now scheduled for November 1, had been delayed by appeals by tobacco industry lawyers. They argued that the trial judge was improperly allowing punitive damages, usually the biggest portion of cash payments awarded by U.S. juries, to be set for all Florida's sick smokers at once. Martin Feldman, an analyst at Salomon Smith Barney who was at the trial, agreed that the prospects look dim for the industry in the near-term. ``Over the next few months, I think the litigation cloud will look severe and the sentiments will not be exaggerated. The market reacted appropriately today given the scale of decision,'' he said, adding that the plaintiffs are seeking a claim for punitive damages in excess of $100 billion. ``I think the industry will do all it can to try to minimize the award and I think they will be able to show evidence that victims knew risks, but even that prospect does not dilute the difficulty of this decision,'' Feldman said. Analysts said the amount the damages will rattle investors. ``Clearly the market is concerned and nervous about the trial,'' Herzog said. ``We are going to hear a very large punitive damage award amount at end of second phase of the trial, and that has investors spooked.''

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