A federal jury in Kentucky returned an antitrust verdict against

United States Tobacco

(UST) - Get Report

Wednesday, ordering the company to pay $350 million to a competitor in the snuff business.

The ruling unnerved Wall Street, and shares of U.S. Tobacco's parent company, Greenwich, Conn.-based

UST

, fell 2 11/16, or 14%, to 16 11/16 around midday. (U.S. Tobacco's shares closed down 2 15/16, or 15%, at 16 7/16).

In a lawsuit filed in 1998,

Conwood

, a Memphis-based company known for the Kodiak brand snuff, accused U.S. Tobacco, the maker of Copenhagen and Skoal, of anticompetitive marketing and promotion tactics. The smaller company sought up to $500 million in damages.

U.S. Tobacco can easily afford the damages awarded by the jury, Wall Street analysts said. But under antitrust law, the award could be trebled, costing U.S. Tobacco up to $1.05 billion.

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U.S. Tobacco said it would appeal the decision.

The dispute centers around the lucrative moist snuff market, where only four companies compete and profit margins are close to 80%. Conwood's market share is around 13%; U.S. Tobacco's is around 79%. Both companies have plants in western Kentucky, where millions of pounds of the dark-fired tobacco are grown.

Conwood made profits of around $1 billion in the 1990s, while U.S. Tobacco made more than $5 billion, experts testified in the trial.

Each side accused the other of stealing advertising displays. Conwood said U.S. Tobacco was trying to control point-of-sale advertising, vital in the tobacco industry because of federal and state advertising restrictions and because snuff customers, generally young and middle-aged white males, are extraordinarily loyal to their brands.

Conwood, which had sought to gain market share with lower-priced products and plastic cans that could remain on store shelves longer, accused U.S. Tobacco of offering retailers under-the-table rebates and increasing width in racks to limit space for low-priced products. Further, Conwood contended, U.S. Tobacco spread gossip that Conwood snuff was stale and full of stems and fiberglass.

U.S. Tobacco did not deny working to control the market, but the company said its practices did not the fit the narrow definitions of antitrust law.

"We believe that the plaintiff failed to prove its case under applicable law, especially in light of the voluminous evidence which clearly shows that U.S. Tobacco and Conwood compete in a highly competitive marketplace," said Vincent A. Gierer, Jr., U.S. Tobacco chairman and chief executive, in a statement Wednesday. "We also believe that the size of the award was completely unjustified given the evidence presented at trial.''

Roy Burry, an analyst at

Brown Brothers Harriman

, said investors were punishing U.S. Tobacco harshly because they were inaccurately associating antitrust litigation between tobacco companies with unrelated criminal and civil litigation seeking damages from the industry. The company is not a target of the federal case against the industry or of a class action lawsuit seeking damages for ill Florida smokers.

Burry rates U.S. Tobacco shares neutral, and his firm has not done underwriting for the company.