Gauloises cigarette maker Altadis has rejected an improved 47 euro-a-share bid approach from Imperial Tobacco.
The tobacco sector has seen a number of deals recently
The new move - up from an earlier indicative offer of 45 euros a share - valued the Franco-Spanish firm at about 12bn euros ($16bn; £8.2bn).
Altadis said the offer undervalued the company, but Imperial responded by saying it was a "full and fair price".
Imperial is the world's fourth largest tobacco group, with brands such as West and Lambert & Butler.
Altadis - which is the world's fifth biggest tobacco group - owns the Fortuna brand in addition to Gauloises.
The tobacco sector has seen a spate of takeovers recently as the industry consolidates.
In December last year, Japan Tobacco agreed to buy Silk Cut maker Gallaher for $19bn.
And in February, Imperial Tobacco - which employs 14,500 staff in 130 countries - agreed to buy the US cigarette maker Commonwealth Brands for £974m.
A deal between Imperial and Altadis would narrow the gap on larger rivals Philip Morris, Japan Tobacco and British American Tobacco.
But in a statement, Altadis said the new approach from Imperial reflected "neither the strategic value of the company nor the diversity of its unique assets, nor its future growth prospects, and so it has unanimously decided to reject it".
In response, Imperial Tobacco said it believed it had offered a fair price and indicated that it would not give up the fight.
"Imperial Tobacco continues to believe that a combination with Altadis is strategically compelling and in the interests of both companies' shareholders," the company said.