VANCOUVER, July 4 (Reuters) - A U.S. District Court judge has struck a blow to Canada's $1 billion lawsuit against RJ Reynolds Tobacco Holdings that accused the tobacco giant and its subsidiaries of cigarette smuggling.

Judge Thomas McAvoy said the lawsuit ran afoul of a 1700s English common law rule adopted by the United States that prohibits its courts from being used to collect another country's revenue. McAvoy handed down the decision Thursday but it was not made public until Tuesday. The ``Revenue Rule'' has been criticised as outdated in the modern era of closely-linked national economies and tax treaties, and McAvoy's ruling hints he would like to see the issue of its continued validity decided at higher level of the U.S. justice system. McAvoy, who sits on the U.S. District Court for northern New York state, said if it were within his legal jurisdiction, he ``would be inclined to find the Revenue Rule outdated'' at least in some instances. Canada filed suit in December alleging that cigarette makers attempted to defraud it of tax revenue in the early 1990s with a scheme that shipped Canadian brands of cigarettes to the United States and then smuggled them back into Canada. The smuggling of over cigarettes into Canada ran rampant in the early 1990s as Canadians attempted to avoid high taxes that were designed to reduce smoking. The flood of illegal smokes eventually forced the taxes to be reduced. The civil lawsuit, which also named the Canadian Tobacco Manufactures Council, accused the tobacco maker of breaking U.S. anti-racketeering laws and sought compensation for the lost tax revenue. McAvoy's 55-page ruling dismissed the lawsuit at the request of the defendants, although he sided with Canada on several legal points and acknowledged that Canada suffered economic harm. A copy of the ruling was first obtained by the French language broadcasting service Radio Canada. Efforts to reach the tobacco makers for comment on the ruling were not immediately successful. Fred Bartlit, the private attorney in the United States representing Canada, said on Tuesday that he had only just received a copy of the ruling and no decision had been made on filing an appeal. RJ Reynolds International sold its Canadian unit, RJR MacDonald, to Japan Tobacco Inc last year, but retained all liabilities that might arise from the smuggling investigation.

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