By Donna Smith

WASHINGTON, July 19 (Reuters) - Defying a veto threat from President George W. Bush, a U.S. Senate panel overwhelmingly approved a bill on Thursday to finance expansion of a children's health care program with an increase in tobacco taxes.

The Senate Finance Committee voted 17-4 to provide an extra $35 billion in health care coverage for low income children, setting the stage for a battle with the White House over an issue that is likely to play a role in next year's presidential election.

Majority Leader Harry Reid, a Nevada Democrat, said the Senate would take up the legislation later this month despite a veto threat by Bush, who favors using tax breaks to expand health coverage to the uninsured.

"We are going to fight (for) this," Reid said. "This is important."

The bill would ensure that health coverage continues for some 6.6 million children currently enrolled in the State Children's Health Insurance Program, known as SCHIP. It also would make about 3.2 million more children eligible for the program that is meant for low income families unable to afford insurance, but who earn too much to qualify for Medicaid.

The bill would raise the federal tax on cigarettes to $1.00 a pack from the current 39 cents. Taxes on other tobacco products would go up as well, with the tax on cigars rising to as much as $10 on a single premium cigar from 5 cents currently.

Sen. Trent Lott, a Mississippi Republican, called the proposed cigar tax increase "ridiculous."

But Finance Committee Chairman Max Baucus, a Montana Democrat, said the $10 tax would be imposed on the most expensive cigars and that raising tobacco prices could lead to additional health benefits. A premium cigar can sell for $40 or more each.

"Increasing the cigarette tax will discourage smoking, particularly among teens," Baucus said.

In Nashville, Tennessee on Thursday, Bush reiterated his opposition to the bill, saying it would expand the government's role in health care and undermine the private U.S. health care system.

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