The lead attorney in settlement talks, Mike Moore, said last night they were progressing well. "We have made tremendous progress," he said. "We got more concessions from the industry today. We are very optimistic that we can resolve this matter very, very soon."
Shares in BAT, which owns US tobacco group Brown & Williamson, rose 21.5p at one point, closing 14p higher at 582p. Philip Morris, the world's largest cigarette company, was the most actively traded stock on the New York Exchange, its shares jumping over 4 per cent, while shares in the number two group, RJR Nabisco, rose 2.5 per cent.
A spokesman for BAT said pressure was growing on the industry to reach a settlement ahead of the first Medicaid lawsuit on 7 July. Until now, all the litigation cases have been private lawsuits or class actions. The Mississippi Medicaid case, thought to be for several million dollars, is being brought by Mr Moore. "I don't see how he can drop his suit unless an outline agreement can be reached," said BAT. "Both sides have an interest in getting this resolved quickly."
Diana Temple, an analyst in Salomon Brothers' New York office, said: "It is highly likely we'll get a settlement soon."
While BAT was keeping quiet about what a settlement might mean, analysts said the end to uncertainty would be positive despite substantial costs to the industry, estimated at around $300bn.
One significant new demand, leaked yesterday, was a requirement for the tobacco companies to pay $50bn as a "restitution" sum for misleading consumers about the dangers of smoking. The proposal is a response to the tobacco companies' demands to be shielded from punitive damages won in smokers' lawsuits - one of the biggest obstacles in seven months of settlement talks according to insiders.
Although a $50bn payment would wipe out the tobacco industry's annual sales, analysts said the low price of cigarettes in the US meant there was plenty of scope to claw back some of the cost in higher prices.
Jonathan Fell from UK brokers Merrill Lynch said: "Cigarettes are massively cheap in the US and the tax burden is really low. In the US a packet of Marlborough costs about pounds 1.20 compared to pounds 3.12 here. These companies will try to pass on the costs to consumers. They play it down because it would upset the health lobbyists."
Analysts said the $50bn plan would also be attractive, because tobacco companies could offset the cost against tax, whereas punitive damages were not tax-deductible. Mr Fell said tobacco companies' profits would be hit but share prices would rise.
Brown & Williamson last year made $780m from US domestic operating profits on $4.2bn of US tobacco sales.
"They are not going to make the profits they did," Mr Fell said. "But settlement would put BAT's US business on a more stable footing. The threat of massive lawsuits means tobacco is in for free in BAT's share rating at the moment."
Any settlement would restrict tobacco companies' ability to advertise and could require the groups to pay billions up front and $8bn to $15bn a year in perpetuity.