THE US tobacco industry, after years of rejecting any liability for smokers ailments, is preparing to admit it has been seriously damaging the country's health and to pay compensation but only if it gets protection from future lawsuits.

The stakes are enormous. The compensation, to be paid out over 25 years, could be as high as $300 billion. Lawyers handling claims could earn up to $360 million a year and a whole new bureaucracy to process claims would be set up.

The pressure on the big tobacco firms to come to agreement has been increasing as class actions against them pile up in courts around the US. The defence of non liability by the companies, claiming that nicotine was not addictive, was fatally undermined last month when one of the smaller tobacco firms, Liggett, broke ranks and settled its lawsuits.

The bigger companies were shocked when Liggett publicly acknowledged that, tobacco was addictive and causes cancer and that the industry had been deliberately marketing its products to children as young as 14.

Liggett, along with the bigger companies, was being sued by 22 states for the costs of medical treatment for smoking related illnesses under the Medicaid Public Health Scheme. The states accused the industry of hiding the adverse effects of its products.

Under the settlement, Liggett agreed to turn over thousands of pages of internal documents which the lawyers for the states believed would prove their charge that the industry has for decades carried out a conspiracy of silence and deceit. Liggett, whose brands include Chesterfield, agreed to pay a quarter of its pre tax profits to the states over the next 25 years.

The first reaction of the four biggest tobacco companies, which share 98 per cent of the domestic market, was to try and block the release of these damaging documents. These companies are Reynolds a subsidiary of the R.J.R. Nabisco Holdings Corporation; the Philip Morris companies; the Lorillard company, which is part of Loews Corporation; and Brown and Williamson, a subsidiary of the British company, BAT Industries.

But behind the scenes, the big companies realised that the game was up and two weeks ago, top secret negotiations began in the Washington DC area between Philip Morris and R.J.R., representing the other two majors as well, and the plaintiffs, represented by the attorneys general of four states, Mississippi, Arizona, Florida and Washington.

Yesterday, the Wall Street Journal got a front page scoop on the progress of the negotiations and the terms being discussed. The two tobacco companies refused to comment but the existence of the settlement talks was soon confirmed.

The proposal now said to be on the table calls for the industry to pay between $250 and $300 billion over the next 25 years into a compensation fund, with a significant portion going towards smokers' claims. Last year, the industry had revenues of about $45 billion.

In another major concession, the industry would accept the new anti smoking rules of the Food and Drug Administration banning billboard advertising within 1000 feet of schools or playgrounds and barring the use of cartoon characters such as Joe Camel in the adverts. But reports say the industry is preparing to accept more drastic restrictions such as a total ban on outdoor advertising and on the use of any human figures such as the Marlboro Man".

The two companies have also indicated that they are ready to disclose the hundreds of chemical additives in cigarettes. This disclosure would be a vital part of the immunity from future law suits that the industry is demanding in exchange for the multi billion compensation fund.

This immunity would be enshrined in legislation by Congress, which is controlled by the Republican party. The Republicans usually show favouritism towards the tobacco industry from which it gets generous political contributions.

President Clinton, who has been an outspoken campaigner against the tobacco companies because of their targeting of young people, has indicated that he would veto any legislation which did not ensure; an adequate compensation fund. The White House is said to be concerned that the immunity for the industry from law suits might be too sweeping. It also wants the compensation fund to be higher than $300 billion.

Observers warned yesterday that the negotiations could yet fail. They said that the compensation figures were being leaked by the anti smoking lobby and that the $300 billion fund could end up at less than half that. The industry would probably recoup part of the payout through increased prices.

The New York stock exchange responded favourably to the reports of a future settlement between the industry and the plaintiffs, as the share prices of the four major tobacco companies rose.