Shares in the world's biggest cigarette maker, Philip Morris, have slumped 11% after the company cut its profits forecast for 2002, saying smokers are switching to budget brands.

Philip Morris makes premium brands Marlboro and Virginia Slims, but the gloomy and uncertain economic outlook has got smokers reining in spending and buying more smuggled cigarettes.

The firm will hit back by doubling spending on marketing this year to $650m, chief executive Louis Camilleri told analysts.

The tobacco firm was also faces penalties of $850,000 after a jury in California found in favour of a smoker, Betty Bullock, who brought a negligence suit after contracting cancer of the lungs and liver.

Rivals hurt too

The news was released after US stock markets closed on Thursday. But on Friday shares in Philip Morris dived 11% to close at $37.86.

The profit warning follows one from rival tobacco firm RJ Reynolds earlier this month.

Philip Morris said it now expects profits to rise 3% in 2002, instead of the 9% it forecast in July.

Earnings per share will grow by between 3% and 5% - much less than the July forecast of 9% to 11%.

The Betty Bullock hearing is still continuing and will consider whether to impose further damages at a hearing starting on 1 October.

The company has declined to comment on the verdict.