UPDATE 3-U.S. FDA aims to cut nicotine in cigarettes, shift toward e-cigarettes

e-cigarettes@ (Recasts throughout, adds quotes from FDA commissioner, public health advocate comments, WASHINGTON dateline)

WASHINGTON, July 28 (Reuters) - The U.S. Food and Drug Administration wants to reduce nicotine levels in cigarettes and move smokers toward potentially less harmful e-cigarettes, in a major regulatory shift announced on Friday that sent tobacco stocks plunging.

FDA Commissioner Scott Gottlieb outlined a package of measures the agency plans to explore, embracing the idea that e-cigarettes may benefit public health by reducing smoking rates.

"Nicotine itself is not responsible for the cancer, the lung disease and heart disease that kill hundreds of thousands of Americans each year," he said. "It's the other chemical compounds in tobacco and in the smoke created by setting tobacco on fire that directly cause illness and death."

The FDA's move to consider reducing nicotine levels in cigarettes sent shares of major tobacco companies in the United States and UK plummeting in heavy trading volume, with the world's biggest producers poised to lose about $60 billion of market value.

The agency cannot reduce nicotine levels to zero, nor can it ban cigarettes, but Gottlieb said the FDA would study regulating nicotine levels in an attempt to make cigarettes less addictive.

The announcement sets in motion a lengthy rule-making process that will involve public comment and input from multiple stakeholders before any measures take effect.

For e-cigarettes, the agency extended the deadline by up to four years, and up to three years for cigar companies, to comply with a 2016 rule that gave the FDA oversight over the products, giving them more time on the market without regulation.

"While there's still much research to be done on these products and the risks that they may pose, they may also present benefits that we must consider," Gottlieb said.

Matthew Myers, president of the Campaign for Tobacco-Free Kids, said the FDA's proposal "represents a bold and comprehensive vision with the potential to accelerate progress in reducing tobacco use and death."

But he added that the extension of e-cigarette deadlines "will allow egregious, kid-friendly e-cigarettes and cigars, in flavors like gummy bear, cherry crush and banana smash, to stay on the market with little public health oversight."

Gottlieb said the FDA would consider regulating "kid-appealing flavors" in e-cigarettes and cigars, while possibly banning menthol in cigarettes.

British American Tobacco shares, trading close to all-time highs, fell as much as 11 percent and were on track for their biggest one-day loss in nearly 18 years.

Altria, which makes the Marlboro brand of cigarettes, fell as much as 16 percent, slipping into the red for the year.

British American Tobacco said it was not surprised by the FDA move to cut nicotine.

"Our American subsidiary, Reynolds American Inc. and its operating companies are encouraged by FDA Commissioner Dr. Scott Gottliebs comments today recognizing tobacco harm reduction policies and the continuum of risk for tobacco products," the company said in a statement.

Gottlieb also held out the possibility that premium cigars would be exempted from FDA oversight, but the overall outlook for traditional tobacco products appears grim.

"Its hard to overstate what this could mean for the companies affected: non-addictive levels of nicotine would likely mean a lot fewer smokers and of those people who do still light up, smoking a lot less," said Neil Wilson, a senior market analyst with ETX Capital in London.

"This is just the U.S. regulator acting but we can easily see others, particularly in Europe, where regulatory pressures are already extremely high, following suit," Wilson said. (Reporting by Toni Clarke and Ginger Gibson in Washington; additional reporting by Vikram Subhedar in London; editing by Chris Sanders and Tom Brown)