China's market is huge as 60% of Chinese men smoke

Last week, BAT announced it would build a $1.5bn (�800m) joint venture factory in China, churning out 100 billion cigarettes a year.

But the State Tobacco Monopoly Administration says it has not approved the deal.

BAT says it won clearance "from the highest levels of state government".

"We wouldn't have made an announcement of the magnitude that we did last Friday if we didn't have approval," BAT spokeswoman Teresa Lathangue told the BBC.

Reprimand

BAT appears to have stumbled into a bureaucratic turf-war by bypassing the regulator, though an investment of $1.5bn would normally have to receive approval from central government.

Its spokeswoman acknowledged that "We haven't been negotiating with the STMA".

The STMA has issued a statement on its website making its displeasure obvious: "We have not authorised any foreign tobacco company to invest in any cigarette factory inside China", it says.

The agency has "issued an internal document which clarifies that we have not approved any Sino-foreign cigarette joint venture", an STMA official said.

"Under China's tobacco regulations, we're the only ones who can grant approval to such ventures," the spokesman added.

Local firms under threat

The prospect of foreign manufacturers gaining a foothold inside China has led to complaints from the country's predominantly small-scale cigarette firms.

Chinese cigarette-makers fear that the price of high-status foreign brands could drop by as much as 40% if they are manufactured inside China, the state-run China Daily has reported.

In May, it cited a senior China Tobacco Society official warning that local producers - who already face reorganisations and closures - could be swamped.

"I have heard that BAT's proposed annual output would be two million cases if it is allowed to establish a joint venture, which is too big compared to domestic factories," Zheng Fuqiang, the CTS' deputy secretary general told the paper.

China has 350 million smokers who puff their way through 1.7 trillion cigarettes a year, making it world's biggest tobacco market and increasingly valuable as anti-smoking campaigners are targeting public smoking in the West.

BAT is still negotiating to secure land for the factory, which will take two years to build, the company spokeswoman said.

The BAT spokeswoman said the firm was "not entirely unsurprised" by the STMA announcement.

Ironically, Western investors in China have pressed hard for Chinese officials to make greater use of the country's regulatory system.