The funny thing is, I don't smoke
I did, however, spend a lot of time in bars, especially those frequented by soldiers. You learn a lot of bar tricks this way. There's a catch to it, as with all bar tricks, but it's still a neat trick, and therefore passes the acid test of getting you a free drink from the person that bet you.
Simply state that you intend to tie a knot in a cigarette to the people you are drinking with. This usually gets the attention of a few more people around you, but then if you didn't want an audience, you wouldn't be doing it in the first place.
You then have to borrow a cigarette. This is your opportunity to ask that great looking guy or gal (if you like smokers) for one to use in the trick. If you already smoke, you may skip that part.
The next thing is to get the plastic the pack is wrapped in, open it along the seam and smooth it out, removing any ragged bits. If you don't have a pack yourself, you can get one from the previously-mentioned hot-looking smoker. You may have to say something at this point that you aren't going to do something dorky like tie the plastic around the cigarette and call it done.
Wrap the cigarette tightly in the plastic so that the extra plastic extends beyond the ends of the cigarette. Slowly bend the cigarette and using the thinner ends of the wrapped plastic to steer, tie a knot in the cigarette. It doesn't have to make a bow or anything fancy, the fact that it is in a tight loop is enough to astound the crowd (which you will have if you do it right.) The key is to make sure the plastic is tight on the cigarette, and to make smooth movements.
I have found that you can explain the effect without reducing the impression, but only if they ask nicely. The trick is that the plastic keeps the paper fibers from breaking, simple as that. If the fibers are forced to bend, the paper won't tear.
Be sure and practice this a few times, as a rushed job or loose plastic will allow the paper to tear. Done right, the cigarette will be wrinkled but smokable when untied.
I did this trick at a nodermeet at Yclept's house. (Among the guests were Pint and Indigoe.) Luckily, I got it right the first time.