Democrats and Republicans on the Senate health committee have been trying for months to negotiate a deal that would give the Food and Drug Administration oversight of cigarettes.
Late Wednesday, Sen. Judd Gregg, R-N.H., the chairman of the committee, sent Democrats a draft of what he said was his final legislative proposal.
But Democrats rejected the offer, saying it didn't go far enough.
"Unfortunately, the proposed legislation which Republicans put forth today falls far short of the strong FDA authority which is needed to effectively do the job," said Sen. Edward Kennedy, D-Mass., the leading Democrat on the health committee. "A weak bill is worse than no bill at all because it would give the public a false impression that their health was being protected."
Democrats and anti-smoking advocates said they were concerned that a provision in Gregg's bill that allowed only Congress to ban cigarettes was so vaguely written it could have prevented the FDA from requiring changes to make cigarettes safer.
"The vague language was a loophole that could prevent FDA from taking any steps to reduce the harm caused by tobacco," said Matthew Myers, president of the Campaign for Tobacco-Free Kids.
Mark Berlind, a lawyer for Philip Morris parent company Altria, rejected that. He said health groups wanted FDA to be able to ban tobacco products, something that was in a previous bill sponsored by Kennedy.
"We're disappointed that these talks broke down over a last-minute insistence that FDA be able to ban all cigarettes for adults," Berlind said.
Other areas of disagreement include how far states should be able to go in setting their own restrictions on the industry and whether tobacco companies can be sued for failing to adequately warn people about smoking hazards.
This latest effort by lawmakers to regulate the tobacco industry was the most serious in years.
Tobacco-state lawmakers who previously opposed FDA regulation said they would support it in exchange for financial assistance for tobacco farmers.
Philip Morris, the nation's largest cigarette maker and a major campaign contributor, also reversed its previous position and endorsed FDA regulation.
Other tobacco companies opposed the idea, saying the new advertising restrictions would make it harder to compete with industry leader Philip Morris.
The FDA asserted authority over cigarettes in 1996, but the Supreme Court later ruled that only Congress can give the FDA that power.