Wow, that's so discouraging to read. I'm firmly against smoking, I've never even tried it (or any drugs) and neither has my husband. So, we both stand firm on it being unacceptable. That being said, we aren't idiots either and know it could very well happen when our son gets older. I have a 15 year old sister whom I am very close to, so I'm trying to think about how I would feel about that. First of all, I would have to ask where he and your niece were able to get the cigarettes? Then, I would explain to him in as graphic detail as possible the effects of such a bad habit to start. There are websites to help you gather information, I think one is www.thetruth.org. Not 100% sure though.
Do you smoke? Anyone close to your son smoke? If so, maybe his exposure to seeing that should be limited - very limited. It's hard to say, "don't do this" if you or someone close to him is doing it. One of those cases where do as I say and not as I do, really doesn't work. He could be looking for some attention by acting out. You mentioned that you're a single-mom...is Dad in the picture where you could team up and deal with this?
I think honest, direct communication with your son regarding this is very, very important. Talk to him, tell him why it's wrong (besides being illegal) and why it hurts you to see him do this.