1/24/97 -- 5:22 PM

America Offline, Bjt,0613

NEW YORK (AP) - America Online is facing its biggest challenge yet to a new pricing plan that encourages customers to go online but instead leaves many listening to annoying busy signals.

One day after a group of state officials met to confront America Online over delays in signing on, New York state's attorney general said Friday he will sue the company unless it promises refunds and stops promoting a plan it can't reliably deliver.

The move could be followed by lawsuits by several other states unless AOL comes up with a settlement that appeases irate customers. However, America Online chairman Steve Case, appearing later on the cable network CNBC, said the company was not considering any refunds.

``Consumers that want refunds should be able to get refunds.'' Attorney General Dennis Vacco told a press conference at his downtown Manhattan office. ``You don't sell 10,000 tickets to a theater that you have only 3,000 seats for.''

Vacco said he notified AOL in a letter that a lawsuit alleging false advertising and ``repeated and persistent fraud'' would be filed next Thursday unless the company provides a satisfactory response.

The move was made after representatives for 20 state attorneys general voiced their concerns with America Online officials in Chicago. Details from that meeting weren't disclosed.

An America Online spokeswoman declined to comment on the threatened lawsuit, saying only that the company was progressing toward ``an understanding'' with the attorneys general.

AOL also has been named in at least eight lawsuits brought by individual customers, including at least three in New York, who say the pricing plan amounts to breach of contract.

The problems stem from AOL's decision in December to start charging subscribers $19.95 a month for unlimited online time, instead of $9.95 for the first five hours of usage and $2.95 for each hour thereafter.

As a result, usage skyrocketed. AOL said its members spent a total of 102 million hours online in December, up from 45 million in September. The increase far outpaced the company's ability to add new equipment to handle it.

Things got so bad that AOL last week pleaded with its members to reduce online time while more capacity is added. The company also said it would cut back on marketing efforts to lure new members.

At the same time, a series of technical problems unrelated to usage have caused partial outages and prevented people from receiving e-mail or using the service's chat rooms.

Jumping to take advantage of the bad publicity, archrival CompuServe is planning to air a commercial during Sunday's Super Bowl that contains a thinly-veiled stab at AOL's usage problems - 15 seconds of a blank screen accompanied by a busy signal.

AOL has promised to spend $350 million to upgrade its network, with most of the money going toward adding modems and building a new data center. But it says the problems won't go away until sometime this spring.

``These customers are just being told `just bear with us, just wait,''' Attorney General Vacco said. ``The customers should not be penalized for the faulty projections of AOL's.''

Other online services offer unlimited access plans, including the Microsoft Network, but Vacco said the bulk of about 100 complaints sent to his office in recent weeks concerned AOL.

America Online stock closed down 50 cents at $36.75 a share on the New York Stock Exchange.

Copyright 1997 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.