By Paul Geitner
The Associated Press

BRUSSELS, Belgium - The maker of Marlboro cigarettes agreed Friday to pay $1.25 billion to help the European Union combat smuggling and counterfeiting - and to end years of legal wrangling over a black market that both sides say costs them hundreds of millions of dollars annually.

The EU's head office hailed the deal with Philip Morris International, the largest payment it has ever extracted from a single company, as a landmark that could be copied by other tobacco giants threatened with litigation.

"We hope it will serve as a model for other manufacturers who are willing to work with us to combat illegal trade in their products," said EU Budget Commissioner Michaele Schreyer.

The goal is to wipe out illegal sales of black market cigarettes - sometimes genuine but these days usually counterfeit - that deprive manufacturers of sales and governments of tax revenue while generating profits for organized crime or even terror groups.

Philip Morris estimates 1 to 2 percent of the 232 billion cigarettes sold with its brands across the 25-nation EU each year are counterfeit.

While the EU agrees that fake cigarettes today are the main problem, and getting worse, its case began in the 1990s over the real article.

The EU alleged Philip Morris and other tobacco companies intentionally oversupplied low-tax markets with Marlboros and other brands so the surplus could be smuggled into countries with higher taxes and sold cheaply.

Three lawsuits filed by the EU in U.S. courts were dismissed on technical grounds, but a U.S. appeals court gave the EU a green light in January to file a new one based on money laundering laws. Philip Morris, meanwhile, counter sued in a European court.

As part of the agreement, all litigation is resolved.

Schreyer conceded that smuggling of genuine Philip Morris cigarettes had been "greatly reduced" over the last few years. She refused to call Friday's deal a settlement or to characterize the payment as a fine for past behavior by Philip Morris.

The agreement includes no admission of liability or wrongdoing, EU officials said.

Philip Morris International, a unit of Altria Group Inc., will make the payments over 12 years, with half coming in the first three years.

The money will go to the EU budget and the 10 countries that joined the EU's lawsuit against the company: Belgium, Finland, France, Germany, Greece, Italy, Luxembourg, the Netherlands, Portugal and Spain. Other EU countries may join later.

The EU portion is slated to beef up the anti-fraud office in Brussels.

The agreement also requires Philip Morris to pay more "in the event of future seizures in the (EU) of its genuine products above defined quantities."