CIGARETTE maker British American Tobacco (BAT) warned it faced a challenging year in 2003 and said pre-tax profits had been flat in the first quarter.

The Lucky Strike-to-Dunhill group said operating profit was one per cent lower at £612m, reflecting conditions in the "intensely competitive" US market and the weakness of a number of currencies.

BAT said that at comparable rates of exchange, operating profit would have risen by two per cent. Bottom line pre-tax profits for the three months were £464m compared with £463m for the same period last year.

Growth in BAT's global brands continued, with Dunhill, Kent, Lucky Strike and Pall Mall up a combined 15 per cent.

Chairman Martin Brough-ton said: "Bearing in mind the state of the world economy and the difficult trading environment in the US, this is a very resilient performance.

"There is no doubt 2003 will be a challenging year for businesses generally. We entered the year in a strong competitive position and are performing in line with expectations."

London-based BAT employs 70,000 worldwide, and has UK operations in Southampton and Darlington.