* Deal includes larger warnings on cigarettes, menthol ban
* Britain and others free to impose plain packaging
* First EU-wide regulations on e-cigarettes agreed
By Charlie Dunmore
BRUSSELS, Dec 18 (Reuters) - European Union diplomats approved new anti-tobacco legislation on Wednesday, including larger health warnings on cigarette packets and the bloc's first rules on electronic cigarettes.
The new rules are designed to make smoking less attractive - particularly to young people - in a bid to reduce the estimated 700,000 tobacco-related deaths in Europe every year.
"Agreement on the tobacco directive is a big step towards a healthier and more prosperous society," said Vytenis Povilas Andriukaitis, the health minister of Lithuania, which currently holds the rotating EU presidency.
The deal was struck after governments and the European Parliament resolved a dispute over how tightly to regulate the market for e-cigarettes.
Some analysts predict e-cigarette sales will eclipse the $700 billion-a-year market for ordinary cigarettes in 10 years. Big tobacco firms, including Philip Morris owner Altria, British American Tobacco and Imperial Tobacco have all moved into the sector to offset declining cigarette sales, particularly in developed countries.
Under the agreement, most e-cigarettes can be sold as consumer products rather than as more tightly regulated medical devices, as governments had initially wanted. Countries will be free to regulate e-cigarettes as medicine if they choose.
Refillable e-cigarettes will be allowed, but the European Commission could impose an EU-wide ban in future if three or more member states prohibit them on health grounds.
From 2016, when the rules changes will take effect, cigarettes, rolling tobacco and other products will have to carry graphic picture and text warnings covering 65 percent of the front and back of packets.
Countries that are contemplating bans on all cigarette branding, such as Britain and Ireland, will be able to introduce so-called plain packaging if they wish.
Cigarette makers described the rules as disproportionate and questioned the health benefits they would bring.
"Over-sizing health warnings to 65 percent with pictures positioned at the top of the pack... will not work, as people already understand the health risks associated with smoking," Japan Tobacco Inc said in a statement.
"Rather, these restrictions will confuse retailers and consumers, making it difficult for them to distinguish brands."
But health campaigners said the new requirements would make it harder for companies use misleading marketing to attract new customers.
"The tobacco regulation supported today by governments is a victory against the tobacco industry and its intense lobbying," said Monika Kosinska, secretary general of the European Public Health Alliance.
The rules also include a ban on smoking tobacco products containing flavours such as fruit or vanilla. Menthol cigarettes will be banned from 2020, after some governments demanded a slower phase-out.
Studies show that flavoured cigarettes are becoming increasingly popular among young smokers and often act as a 'gateway' to other tobacco products.
The deal is now expected to be formally approved by EU ministers and the full parliament before entering force next year.