WASHINGTON (CNN) -- White House Counsel Alberto Gonzales Tuesday suggested the federal government would take punitive action against the tobacco industry if it does not agree to settle the government's racketeering case.

"The White House drives a lot of policy on issues that affect the tobacco industry," Gonzales said in an interview with CNN from his West Wing office. "The kind of positions we take on these policies may be affected by how agreeable the tobacco industry is to settling this case." Later in the interview, Gonzales said these remarks "should not be viewed as a threat, but an observation." As Bush's chief White House lawyer, Gonzales is involved in all major legal cases involving the federal government. The Bush Justice Department initiated settlement talks with the country's four leading tobacco companies earlier this year. But talks broke down at the first meeting. Gonzales said the government will keep trying to reach a settlement with the tobacco industry. "We need to get this solved," Gonzales said. "We want to foster an atmosphere of cooperation." The Justice Department had no comment. When asked to describe what kinds of policies the White House could change that would affect the tobacco industry, Gonzalez was vague. "Regulatory policy," he said, declining to cite other specifics. Industry sources said the government could use regulatory power to change the way the Department of Health and Human Services monitors the ingredients in cigarettes and that the government could inhibit the industry's ability to market tobacco products overseas. Industry sources also said the government could decide not to intervene in disputes with other governments over shipments of tobacco products, leaving them to spoil on loading docks. The Clinton Justice Department sued the tobacco companies in 1999, alleging racketeering and collusion in an attempt to recover some $20 billion the government spends annually to treat smoking-related illnesses. In July U.S. District Judge Gladys Kessler again rejected key parts of the government's case, allowing it only to pursue a racketeering case that could result in billions in damages. "We haven't fared too well in the courts, which gives us little leverage," Gonzales said. The tobacco industry reacted cooly to the White House counsel's comments. "We still believe this case has no merit," said Steve Watson, spokesman for Lorrillard Tobacco Co. "There are certainly regulatory and legislative issues out there but we've always tended to view them as mutually exclusive of the lawsuit," Watson added. "We've never really thought any other way. I'm not sure how to take it. If this is a new approach they are taking to the lawsuit, we have not been contacted." Tommy Payne, a spokesman for R.J. Reynolds Tobacco Co., said the company has no interest in discussing a settlement. "We've met with the Justice Department at their request," Payne said. "They gave their point of view. We gave ours. It was a fairly brief meeting and there are no other meetings planned. We are preparing to defend the case."

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