I have a lot of FLAC files ripped from my CD's stored in :
flac/%artist%/%album%/%title%.flac

I also have a lot of MP3 files, which are MP3 versions of the FLACs for portable media players, and some other stuff I have downloaded. These are stored in :
mp3s/%artist%/%album%/%title%.mp3

So both the MP3 and FLAC hierarchies are added as music folders in the media library.

The problem I have is where an identical album is in both hierarchies. If I add the album to a playlist, what I actually get is two versions of each track.

What I would like is for it to remove duplicates from the playlist as they are added, giving the preference to the lossless version. Is there any way of achieving this?

You can use %codec% in your sorting pattern. With that, you can for example move all mp3 files to the bottom of playlist. To eliminate duplicates I would store them (mp3 versions of flac files) in different folder structure - this would allow filtering them from components like facets.