* Court said federal rule on bigger tobacco warnings arbitrary
* Verdict major victory for $11 bln tobacco industry
* Federal government lawyer says will appeal in Supreme Court (Adds details, comments, context)
By Aditya Kalra
NEW DELHI, Dec 15 (Reuters) - An Indian court on Friday quashed federal rules that mandated stringent graphic health warnings on tobacco products, lawyers involved in the case said, in a decision seen as a major victory for the tobacco industry and a setback for health advocates.
India's Supreme Court last year ordered enforcement of the government's 2014 federal rules that required 85 percent of a tobacco pack's surface to be covered in health warnings, up from 20 percent earlier, despite protests by the tobacco industry.
At the same time, the top court had asked a court in southern Karnataka state to rule on the dozens of tobacco industry pleas that challenged the federal rules.
The High Court of Karnataka on Friday struck down the government's 2014 notification, said Aradhana L, a lawyer at Poovayya & Co, who represented tobacco companies including India's ITC and Philip Morris International Inc's Indian partner, Godfrey Phillips India Ltd.
The government lawyer in the case, Krishna S. Dixit, confirmed the rules had been struck down but said he would appeal in the Supreme Court.
Dixit said that for now the older federal rules mandating 20 percent warnings on packs will be in force. But, he added, "the court has allowed us to remake the rules.
Similar battles between tobacco companies and authorities have played out around the world in recent years as governments try to discourage smoking.
India's tobacco packaging rules were among the world’s most stringent and aimed at reducing tobacco consumption which kills more than 900,000 people a year. The World Health Organization estimates tobacco-related diseases cost India about $16 billion annually.
A government survey earlier this year found that 62 percent of cigarette smokers thought of quitting because of warning labels on the packets.
"The court is setting aside a proven strategy on improving public health. This is very disappointing," said Sanjay Seth, head of tobacco control at non-profit Sambandh Health Foundation.
The tobacco industry, however, has maintained the rules were extreme. At one point last year, the industry briefly shut down its factories across India in protest and filed dozens of legal cases.(reut.rs/1Of3fKL)
It was not clear if the tobacco manufacturers, who currently print the mandated bigger health warnings, will stop doing so immediately, or if the government will step in to make a new rule.
Industry lawyer Sajan Poovayya cheered the move. "Bye Bye gruesome warnings on tobacco packages," he said on Twitter after the verdict. (Reporting by Aditya Kalra; Editing by Sanjeev Miglani and Richard Balmforth)