Negotiators did not discuss a proposal to ban sales of duty-free cigarettes, which activists say are frequently diverted into illicit trade that costs governments an estimated $40 billion in lost taxes. GENEVA, March 21 (Reuters) - Negotiators have made significant progress on a global pact to halt smuggling and counterfeiting of tobacco products in a week of talks, the World Health Organisation (WHO) said on Sunday.

But they did not discuss a proposal to ban sales of duty-free cigarettes, which activists say are frequently diverted into illicit trade that costs governments an estimated $40 billion in lost taxes.

Instead, negotiators from 168 countries did agree in closed meetings on the outline of a "tracking-and-tracing" system for tobacco products, the WHO and non-government organisations said.

Senior health officials will attempt to hammer out remaining differences when they meet in Uruguay in November to finalise the treaty, formally a protocol to the 2005 Framework Convention on Tobacco Control (FCTC).

"There has been a great amount of progress. We made breakthroughs in important areas of the protocol, but just need to carry on with this momentum," Vijay Trivedi, policy adviser to the FCTC secretariat, told Reuters after talks ended on Sunday.

"It needs more time, basically," he said, confirming agreement on the outline of a tracking and tracing system.

The treaty would require countries to license tobacco manufacturers, set up the tracing regime with a global data base, and carry out due diligence on sellers, distributors, exporters and importers.

All unit packets of cigarettes would have to be marked with unique serial numbers, a provision that tobacco companies say would cost them hundreds of millions of dollars to implement.

The Framework Convention Alliance, which groups more than 350 non-government organisations, said negotiators had "agreed important provisions to control the supply chain for tobacco products, including ... a licensing system for manufacturers and others involved in the tobacco trade".

But Gigi Kellett, tobacco campaign director at the activist group Corporate Accountability International, said the negotiators did not discuss a ban on duty-free tobacco sales.

Airports, airlines and duty-free operators say they would lose $3 billion a year from such a ban, and that there is no evidence that products intended for duty-free sale are diverted.

Philip Morris International <PM.N>, which makes Marlboro cigarettes and is the world's largest non-state-owned tobacco firm, and British American Tobacco <BATS.L>, the second-biggest cigarette maker, say they back effective measures against illicit trade.

Tobacco kills 5.4 million people a year from cardiovascular disease, cancers, diabetes and other illnesses, according to the WHO, which clinched the anti-tobacco treaty in 2005. The existing treaty obliges governments to protect their populations from exposure to tobacco smoke and reduce demand through price and tax measures, regulating packaging and labelling of products and curbing advertising and sponsorship. (Editing by Kevin Liffey)