Imperial Tobacco results

Sales: �5.9bn Pre-tax profits: �509m UK market share: 41.4%

The shares closed at 853p, down 10.5p.

Reemtsma, the world's fourth largest tobacco group, would cost Imperial around 7bn euros (�4.2bn), analysts said.

Imperial Tobacco shares have been among the best performers on the London stock exchange in the last 18 months, more than doubling in value since February 2000 despite a steady decline in UK cigarette consumption.

The company has offset lower growth in its domestic market by acquiring overseas tobacco firms and smoothly integrating them into its global business.

The company owns the Netherlands' van Nelle hand rolling tobacco business, as well as Rizla, the world's largest maker of cigarette papers.

In April, it bought out Africa's largest cigarette maker Tobaccor, and later clinched a deal to distribute Philip Morris' popular Marlboro brand in the UK.

Strong overseas growth

Imperial Tobacco has also cut costs and kept prices high in Europe, while competing on price in faster-growing markets in Eastern Europe, Africa and Asia.

The company claimed that rising UK sales have enabled it to overtake its closest competitor Gallaher, producer of Silk Cut and Benson & Hedges, for the first time.

Imperial Tobacco estimated Gallaher's share of the market at 39%.

Tobacco firms in the UK face a steady erosion of their domestic sales due to large-scale smuggling from Continental Europe, where cigarettes are far cheaper due to lower tobacco duties.

While the threat of legal action against tobacco firms by former smokers who have contracted cancer has receded in Europe, the industry faces growing legal restrictions on its right to advertise.