The $1.6bn cost of the buy-back will come from the company's huge cash pile, which it is believed could also be earmarked for a takeover of a competitor such as Gallagher.

BAT - the world's second biggest cigarette maker - confirmed the buy-back would not prevent its participation in the continuing consolidation in the industry.

An increase in sales of more expensive brands such as Pall Mall, Dunhill and Kent helped boost BAT's earnings despite a fall in sales volume of nearly 4%.

Challenges

BAT's corporate and regulatory affairs director, Michael Prideaux, said sales had fallen because of moves to reduce the smuggling of its products, and marketing decisions in Latin America.

BAT has restricted the supply of cigarettes to certain wholesale customers since 2001, where it believed those products were likely to be smuggled, he told the BBC's World Business Report.

And the company has introduced some prices increases Latin America in order to protect margins, he said.

Mr Prideaux said the European ban on cigarette advertising has not effected sales but such bans tend to make companies share of the market more rigid.

"It's much harder to introduce a new brand when there is an advertising ban," he said.