Martin Broughton, BAT's chief executive, said the US cigarette market was in transition in the third quarter, as retailers and wholesalers ran down their supplies and prices were lowered.
Although the full effects of the price war were only felt in two of the three months, the impact on Brown & Williamson, BAT's US subsidiary, has almost halved its profits for the first nine months of the year.
Despite this setback, BAT's overall pre-tax profits for the nine months rose by 24 per cent to a record of pounds 1,358m, thanks to the continuing recovery from its insurance businesses and a pounds 123m boost from last year's devaluation of the pound and other currency changes.
Third-quarter tobacco profits fell from pounds 359m to pounds 266m, leaving the nine-month total pounds 12m ahead at pounds 889m.
Mr Broughton said market information suggested that Philip Morris had lost some of its initial gains in US market share.
He said: 'The profitability of the industry has been savaged by the Philip Morris action. All of the players in the industry would welcome a price rise. It's not totally beyond the realms of possibility that there could be one.'
The US government is seeking to impose a hefty duty of 75 cents a packet on cigarettes from next October. Although this rise could be phased in, it is expected to produce a sharp fall in cigarette consumption.
Mr Broughton said: 'It's going to be a very significant increase for the consumer. If the industry wants to get a price increase from the manufacturers, then it won't be able to do it at that time. Either it's got to wait quite a while or do it beforehand.'
Another problem facing the US industry is a bill that restricts the use of imported tobacco leaf - flagrantly in breach of the Gatt trade rules, according to BAT. Mr Broughton said the bill would inhibit cost-cutting.
BAT's tobacco exports, which had been growing strongly, also stalled, and were 4 per cent lower. Its German business cancelled a large contract with Iran because 'they weren't paying the bills'. Exports to China were also lower.
Profits for the nine months from financial services, which includes Eagle Star and Allied Dunbar in the UK, rose by pounds 203m to pounds 593m.
Higher general insurance premiums helped Eagle Star recover from a pounds 48m loss to a pounds 117m profit. Losses on domestic mortgage indemnity insurance, responsible for many of the insurer's problems, have cost the company pounds 81m so far this year.
Losses on the discontinued lines of financial insurance remained 'disappointingly high' at pounds 94m.
Profits from life insurance rose by 13 per cent to pounds 229m.
Kevin Phillips, analyst at Kleinwort Benson, trimmed his forecast of full-year profits to pounds 1,795m, and his dividend forecast to 19.9p a share.
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