THE tobacco industry is threatening to flood Australia with half-price cigarettes to fight plain packaging laws.

It is also threatening to seek billions of dollars in compensation from the Federal Government.

The chief executive of British American Tobacco - which makes popular brands Winfield and Benson & Hedges and sells about 22 billion cigarettes in Australia each year - yesterday said prices could be slashed in half as tobacco giants try to compete with black-market imports.

The Federal Government plans to replace all branding on packets with a drab green colour accompanied only by the name of the cigarette and a graphic health warning.

BAT Australia chief David Crow said cigarette companies would be forced to drastically cut prices because no-name "chop-chop" tobacco and cigarettes - which cost as little as 30 per cent of the cost of a regular packet - would be more attractive.

He said the cheap prices "basically means more people will smoke, more kids will smoke".

"It's going to backfire and go bad and lead to more people smoking, which is just mad if you're sitting at a Government desk." Health Minister Nicola Roxon rejected the claims as a sign of desperation.

"Big tobacco are fighting to protect their profits, but we are fighting to save lives," she said. "I've always said that big tobacco would fight plain packaging tooth and nail. These baseless claims are just another sign of how desperate they are."

"We are not going to back away from this fight." Mr Crow claimed his company was comfortable with gov- ernments trying to reduce smoking across the board, saying: "No one could argue with that."

But he said BAT would fight to keep its brands alive and demand "billions of dollars" in compensation if the Federal Government pressed ahead with the proposal.

"Guys like us are going to defend our trademark," Mr Crow said.

"If they lose it (the legal battle), which we think they will, they'll have to pay compensation and that's billions of dollars - and that's not a smart use of taxpayers' money. It's a seriously dangerous experiment."

NSW Cancer Council's chief executive Dr Andrew Penman said the tobacco giant's plans would be counter-productive because the Government would react by increasing the excise.

The excise levied by the Government, which is at 70 per cent, is not set on the price but the amount of tobacco.

"Whatever they do, the price will not affect the excise or the amount the Government gets," Dr Penman said.

"It will affect the profitability of the company and therefore the company's income tax and also the GST in some way.

"If the industry was to halve the price of cigarettes, it will be an invitation for the Government to increase excise by the same amount and every health expert will call for the Government to do so."

Increasing the price of cigarettes by 10 per cent has proven to reduce the smoking rate by at least four per cent.

Sydney University's school of public health Professor Simon Chapman said the reaction by tobacco industries proved how worried they are about the effects of plain packaging.

"It is telling us how important this move is because the tobacco industry is spinning out of control by threatening price reductions and talk of illegal trade," he said.

"The Government can turn around overnight and increase the excise, and they have in the past."

In South Australia, there are about 1140 tobacco-related deaths each year. Smoking rates in SA have fallen from 28.4 per cent in 1996 to 19.9 per cent in 2008.