The European Commission said today it had stepped up its legal action against Ireland for fixing the minimum and maximum retail prices of cigarettes.
The commission said the practice broke EU law and distorted competition to the benefit of manufacturers' profit margins.
"Unless the legislation in the member states concerned is brought into compliance within two months of receipt of the reasoned opinion, the commission may decide to refer the case to the Court of Justice of the European Communities," the commission said.
Health protection objectives may be adequately attained by increasing excise duties, it added.
It sent Ireland a letter of reasoned opinion, the second and final warning before the country is taken to the Luxembourg-based European Court of Justice, which has powers to force a change in national laws and impose fines.
The use of minimum taxes was the best way to tackle smoking, the commission said.
"This is demonstrated by a legislative proposal currently pending before the Belgian parliament to modify the legislation on minimum retail prices of cigarettes in Belgium," it said in a statement.
EU Taxation Commissioner Laszlo Kovacs said the Court of Justice has already stated that imposing a minimum price is incompatible with EU rules as it limits the freedom of producers and importers to determine their selling price.
"I strongly support member states in their efforts to implement new health policy. However, this must respect community law," Mr Kovacs said.