The Irish government must scrap the "illegal" minimum price it sets for cigarettes and tobacco products, Brussels has warned.

The European Commission says tobacco companies should be allowed to determine their own prices, and government should then decide what level of tax to impose. Under the current system, companies agree to a specific price range. But this, the EC claims, amounts to state collusion in price-fixing.

The average price of a pack of 20 cigarettes in the Irish Republic is E6.40, about 80% of which is excise duty and VAT. A Department of Health spokesman, defending the system, argued that price control was an effective way of protecting children and of encouraging smokers to quit.

But the Brussels warning carries the threat of legal action in the European Court. Taxation commissioner Laszo Kovacs said: "Introducing minimum retail prices for cigarettes is against community law and mainly benefits manufacturers."

ASH, the anti-smoking lobby group, fears that any change would allow tobacco companies to mount cut-price promotions and frustrate government health campaigns.