Pubs where under-18s buy cigarettes three times within two years could be banned from selling tobacco products for up to 12 months.
But despite the proposed new action against retailers, the Government has ruled out making it a crime for youngsters to try to buy tobacco.
The plans come as pubs are adjusting to the raising of the legal age for buying cigarettes, which increased from 16 to 18 on 1 October.
Under Department of Health (DoH) plans, magistrates could impose "restricted premises orders" and "restricted sales orders" for three sales to under-18s over the bar, or via machines, within a two-year period.
These orders would penalise hosts and bar staff as well as the outlet.
The premises order will prevent tobacco being sold on-site. The sales order will ban someone "selling or having management functions in relation to the sale of" tobacco products.
Orders will last up to one year and one of the three offences must be a conviction. A fine of up to £20,000 can be levied for breaching an order.
The DoH expects the orders to be in place in October 2008 as part of the Criminal Justice and Immigration Bill.
Details were revealed this week in a letter from the DoH to councils. A DoH briefing paper says it is not appropriate to make it a crime to try to buy tobacco underage because unlike alcohol, "the harmful effects of tobacco are mainly on the individual smokers and it is, therefore, likely to be disproportionate to make buying a criminal offence".
Federation of Licensed Victuallers Associations chief executive Tony Payne criticised the inconsistency of having a law against buying alcohol while under the legal age, but not an equivalent law for buying cigarettes.