The UK's Imperial Tobacco has said it is buying 90% of Germany's Reemtsma for 5.8bn euros (�3.6bn, $5.1bn).

The combined company will have a production capacity of 200 million cigarettes a year.

Reemtsma is the world's fourth largest cigarette company, whose brands include Davidoff, West, R1 and Peter Stuyvesant. It produced 122 million cigarettes in 2001.

Germany, Poland, Russia, Ukraine and Taiwan account for 70% of the company's worldwide sales.

Imperial, the owner of Lambert & Butler, Embassy and John Player, has strong positions in Britain, Western Europe, Australia and Africa.

"This is a truly transforming deal which move us up into the top tier of the world tobacco industry. We see a bright future in the premier league of tobacco companies," Imperial's chief executive Gareth Davis said.

The joint company is expected to mount a challenge to the domination of the top three tobacco producers - Philip Morris, British American Tobacco and Japan Tobacco.

Analysts were enthusiastic about Imperial's prospects.

"Reemtsma was the big prize in the European tobacco industry and had no exposure to US litigation cases," said one fund manager.

Shares in Imperial were 6.6% up to 971 pence.