British American Tobacco has won the three-way auction to buy the Italian state-owned cigarette company Ente Tabacchi Italiano for £1.6bn and said the higher-than-expected price-tag was justified.

UK-based BAT, the maker of Dunhill and Lucky Strike, beat off bids from Franco-Spanish group Altadis and Italian investment firm Imprenditori Associati.The company said the deal would push into the number two position in Italy - the second-largest tobacco market in the EU.

BAT chief executive Martin Broughton, said: “The price we are paying is higher than the market has been expecting but ... we got a good deal at a fair price."

ETI has about 26% of the Italian cigarette market with brands such as MS and Sax. It also has almost 40% of Italy's cigar sales.

BAT said the deal should lead to annual savings of 35m euros by 2007.