The 47-year-old has told his striker that "it is better if he quits", but says he can continue his bad habit as long as he manages two goals every game
Mancini is believed to have a strong dislike of the player's habit but has given up trying to make him stop.
The Italian boss insists his compatriot's tobacco habit is not his problem, but feels it would be better if he quit smoking.
“It’s not my problem,” Mancini told The Mirror.
“If Mario wants to smoke, it’s his problem. But if he wants my opinion, it is better that he quits.
“But if he smokes 10 cigarettes a day and scores two goals every game, then that’s better.”Balotelli sat in the stands during Manchester City's midweek trip to Spain to face Real Madrid in the Champions League, despite being fit and travelling with the squad to the Spanish capital.
However, Mancini denied claims that Balotelli sat out the fixture because of a breach of club discipline relating to a late night out last week.
It was just a matter of squad rotation in a congested month in the fixture list, according to the 47-year-old.
“Mario was upset, but that’s normal. I don’t think there can be a player who doesn’t play and is happy," he continued.
“But when you have five games in 20 days, like we do, you should pay attention to the consequences.
“It’s better that one important player, like Mario or James Milner, goes to the stand. When you have a full squad it’s very difficult.
“If you want to go through in all competitions, it is important that you have players who understand this situation.”