British American Tobacco Australia said on Thursday it was launching a budget cigarette brand, the latest salvo in a row with the government, which in turn accused the company of targeting teenagers.
BAT, which is spearheading a legal challenge to Australia's plan to introduce mandatory plain packaging for cigarettes, said it was forced into the move to win back market share from illegal tobacco products.
It said that since the government hiked tobacco taxes by 25 percent in 2010, the market had seen massive growth in cheap cigarettes and contraband.
"They're trying to reduce smoking rates through excise but instead it's making people opt for cheaper or illegal options," said BAT spokesman Scott McIntyre.
"It's a simple issue of supply and demand. Our customers have been down-trading to cheaper products or to illegal cigarettes, so we've been forced to compete."
The company has released a brand called Just Smokes, which retails for Aus$11.50 (US$11.43) for a pack of 25, much lower than the average price of Aus$16. Illegal packs are sold for Aus$8-10.
Health Minister Tanya Plibersek said she was not buying the argument.
"By dropping their prices British American Tobacco appears to be directly targeting vulnerable teenagers," she said in a statement.
"We know that young people are the most price-sensitive smokers of all.
"What (BAT) are interested in doing is attracting new smokers and keeping existing smokers, and they'll do whatever it takes to do that."
The government and big tobacco companies have been embroiled in a long-running row over new legislation that will see all cigarettes sold in uniform drab olive-green packets with graphic health warnings from December 1.
Four companies, led by BAT, are contesting the law in the High Court, claiming it infringes their intellectual property rights by banning brands and trademarks.
They also claim it will cut profits and result in fake products flooding the market because plain packaging is easier to reproduce.
Australia is the first country to mandate plain-packaging, but the ground-breaking move is being closely watched by other countries considering similar approaches, including Britain, Canada and New Zealand.
Australia estimates it has 15,000 deaths each year from tobacco-related illnesses.