One of the world's largest tobacco companies has admitted funding a retail association's high-profile campaign against a government ban on cigarette displays in shops

The National Federation of Retail Newsagents claimed the ban, approved by the government earlier this year, would put thousands of small shopkeepers out of business.

But it has now emerged that the federation's campaign received funding from British American Tobacco (BAT) whose lobbying firm, Hume Brophy, emailed MPs claiming the ban would have a "devastating effect on the small business sector in your constituency".

More than 80 MPs backed the federation's campaign – and smaller shops were exempted from the ban on behind-the-counter displays for 18 months, which was a significant victory.

In a letter to Labour MP Kevin Barron, BAT confirmed: "We have provided financial assistance to the NFRN in relation to this campaign." It also confirmed that Hume Brophy had attended meetings between BAT and the federation in which the campaign was discussed. However, BAT denied it used "underhand tactics" or that the federation was a front for the company.

The revelation that the campaign was funded by BAT is significant. Under international guidelines, the UK government is obliged to ensure the drafting of all legislation is free from tobacco industry influence. Now, the fact some MPs may have been unaware the campaign was backed by tobacco money has angered anti-smoking groups.

Lib Dem MP Stephen Williams has written to Hume Brophy, asking it to inform MPs of its links with BAT.

The issue of tobacco funding is likely to trigger fierce debate at the federation's annual conference next week. Some of its 16,500 members have concerns over its links to the tobacco industry.

Solly Khonat, president of the federation in 2009, is a spokesman for the Tobacco Retailers Alliance, a trade body wholly funded by the Tobacco Manufacturers' Association. Several alliance officials are members of the federation. Colin Finch, a former president of the federation, told the Observer this year that the federation was a "puppet of the tobacco industry".

BAT's admission has prompted Barron to write to the health secretary, Andrew Lansley, warning the government's commitment to tobacco control "is being undermined by covert lobbying by the tobacco industry".

He expressed concerns the tobacco lobby would adopt similar tactics as part of a campaign against plans for cigarettes to be sold in plain packs.

A spokeswoman for the federation insisted it had been "very transparent about the commercial relationship that it shares with tobacco manufacturers" and that its campaign had been waged solely in the interests of its members and had not been influenced by the tobacco lobby.

Deborah Arnott, chief executive of the anti-smoking group Ash, said the battle lines were now being drawn between politicians and the tobacco firms as details of how they were funding third parties started to emerge.

"The UK has committed in principle to protecting public health policy from the tobacco industry," Arnott said. "The government must prove that it can turn principles into practice when it launches its consultation on plain packaging later this year."