The European commission pledged yesterday to carry on fighting a lawsuit against two US tobacco giants that it claims have sponsored cigarette smuggling in Europe, despite a ruling against it by a New York court.

"Our case is still alive," said Luc Veron, spokesman for the EU's executive, which was seeking to recoup billions of euros' worth of lost tax revenues. "All options are open." In a high-profile case based on years of investigations, the commission claims that Philip Morris and RJ Reynolds boosted their profits by deliberately oversupplying some countries so that the surplus would be smuggled to the EU. Philip Morris, the world's largest tobacco company, is best-known for its Marlboro brand. RJ Reynolds' brands include Camel and Winston. The defiant response from Brussels yesterday came after a US district court judge in New York threw out the law suit, citing the so-called "revenue rule", which bars one country from enforcing tax claims by other countries. The commission said a second part of the ruling - relating to racketeering and money laundering as part of the "consequences of this smuggling" - allowed for a more detailed claim to be refiled. Philip Morris's vice president, William Ohlemeyer, said: "We said at the outset of these cases that we believed [smuggling] is a problem that can and should be addressed through cooperation rather than litigation, and we still believe that." Commission legal experts were poring over the ruling, but a spokesman said: "We are going to look at the... arguments, and we're going to deploy those in order to win the case. There's a great deal at stake. We're protecting the financial interests of the European community." The decision to sue the two tobacco companies was taken by the commission in its role as guardian of the treaties and of the community's budget. Cigarette smuggling constitutes the biggest single fraud against the EU budget, with a single container of cigarettes costing the EU almost €1m (£610,000) in lost tax. Suspicions of tobacco industry involvement in smuggling have grown since 1997, when researchers demonstrated - by comparing annual global exports with global imports - that about a third of all cigarettes entering international markets each year could not be accounted for.

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