Europe's powerful tobacco lobby suffered a big setback yesterday after Euro MPs backed tough new rules forcing manufacturers to put shocking images of cancerous lungs and rotting teeth on cigarette packets.

In a vote in Strasbourg, the parliament approved legislation obliging the industry, by 2003, to cover 30% of the front of every packet sold in the EU with a health warning. At the moment, in the UK, 6% of a packet's surface is taken up with a warning.

There was immediate retaliation from the tobacco lobby which claimed that several of the measures approved by the parliament risked thousands of jobs, many in the UK.

British American Tobacco warned that the decision to ban European factories from making cigarettes with a tar content of more than 10mg per cigarette for domestic consumption and export could be particularly damaging to employment.

A representative of BAT said: "This will act as a de facto export ban threatening the loss of 1,800 jobs in BAT factories, mainly in the UK, and a further 6,000 jobs among suppliers.

"We are calling upon the Council of Europe ministers - and Alan Milburn, the secretary of state for health - to help eliminate the export clause before it is too late."

The industry now has one last chance to try to derail the measures as the final text of the directive will be hammered out between EU health ministers and Euro MPs in the new year with the European commission acting as go-between.

John Bowis, the Conservatives' health spokesman, yesterday said that the directive as agreed could be challenged in the courts and argued that the decision to extend the rules to cigarettes earmarked for export was a step too far.

But MEPs were adamant that they had acted in the public interest and confident that agreement over the final wording of the text would be swift and uncontroversial. "There's quite a lot of common ground between the parliament and ministers and we should be able to see a final result by spring at the latest," said a source.

MEPs also predicted that the tobacco industry's attempts to wreck the legislation would fail. "We have come under unprecedented pressure from a tobacco lobby which is vehemently opposed to these new rules. Tobacco giants like Marlboro, Benson and Hedges, and Rothmans, have had their own way for far too long," said the Labour Euro MP Catherine Stihler. "They overturned Europe's tobacco advert ban on a technicality, but they will not get rid of these health warnings through legal loopholes."

However, the tobacco industry has already succeeded in watering down some of the rules. Makers won the right to continue using the terms "ultra light" and "low tar" to describe their existing brands.

Brussels estimates that tobacco related ailments kill half a million Europeans each year.

• A Nottingham university "student of the year" will tomorrow refuse to receive his award in protest at the university's decision to accept £3.8m from BAT. Jon Rouse, 32, winner of the MBA finance award from Nottingham's business school, has asked for the £50 prize to be donated to the Imperial Cancer Research Fund. "Accepting money legitimises an organisation that trades in a product that kills people," he said.

The business school set off the controversy by taking BAT's money to open an international centre for corporate social responsibility.