TOBACCO company Gallaher has stepped up its expansion drive with a deal to move into China, the world's biggest cigarette market.

The group, which produces the Silk Cut and Benson and Hedges brands in the UK, has signed a letter of intent with the China National Tobacco Corporation (CNTC).

Under the agreement, one of Gallaher's brands would be made and distributed in China and it would in turn distribute a CNTC brand in Russia.

More than 1.7 trillion cigarettes are sold in the Chinese market each year, about a third of the world's total consumption.

Gallaher chief executive Nigel Northridge said the agreement marked a "significant milestone" in its collaboration with CNTC.

He said the deal, which the group hopes will be completed within the next 12 months, was another step in Gallaher's Euro-Asian expansion strategy.

Gallaher has grown significantly in the past two years, buying Austria Tabak last year and Russia's Liggett-Ducat the year before.

Turnover in the six months to June 30 rose 83.9 per cent to £4.2bn as Austria Tabak was integrated into the Gallaher business.

In the half-year sales rose 58.7 per cent on the same period a year ago, helping pre-tax profits in the first-half rise 23.3 per cent to £223m before one-off costs - ahead of City expectations.

Shareholders will receive an interim dividend of 8.8p per share, up eight per cent on last time.