In Monday’s court filing, rival telecom firm AT&T said the MCI scheme shifted "millions upon millions of dollars" in costs from MCI to AT&T and other companies.

AT&T filed a complaint with the US bankruptcy court arguing for the right to seek damages caused by MCI's alleged scheme and said the court should deny the MCI plan to emerge from bankruptcy.

AT&T said it will "bring racketeering and fraud" charges against its rival.

It said the scheme by MCI remained in effect after the company filed for bankruptcy "and continues to the very date of this filing." It detailed the charges of the long-running scheme that routed some calls through Canada to avoid access fees.

Calling it a "disturbing new development," AT&T General Counsel Jim Cicconi said in a statement that the "investigation raises serious questions as to the validity of MCI/WorldCom's
assurances that it has cleaned up its act."

AT&T alleges MCI illegally
routed calls through Canada

The Justice Department has asked for information on the matter after MCI's telecom rivals complained about the matter.

An MCI spokesman declined to comment on the specific allegations but said disputes over access charges "have existed for decades and are routine in the industry," but that the company would "cooperate fully with any investigation."

The allegations were lodged with the Justice Department just weeks before a court hearing to decide whether MCI can emerge from Chapter 11 bankruptcy after the biggest corporate failure ever.

The Washington Post said the latest allegations, backed by several of the company's competitors, suggested that WorldCom and MCI conspired for nearly a decade with smaller local phone companies to re-route long-distance calls to make them appear as local calls.

AT&T along with Verizon Communications Inc. and SBC Communications have been among the most critical of MCI's efforts to emerge from bankruptcy. They say wiping out MCI's debts could be devastating for the battered industry.

But according to the new complaints, MCI had been defrauding its competitors since 1994, the New York Times said, quoting sources familiar with the situation.

The Wall Street Journal reported that officials at Verizon had heard the allegations from a whistleblower and had then relayed them about two months ago to the US Attorney for the Southern District of New York, James Comey.

US Bankruptcy Judge Arthur Gonzalez had scheduled a hearing for 25 August to consider whether MCI can emerge from bankruptcy, it said.

"The investigation raises serious questions as to the validity of MCI/WorldCom's
assurances that it has cleaned up its act."

Jim Cicconi, AT&T general counsel

MCI is hoping for favourable results with their bankruptcy proceedings. If successful, it would be able to shed as much as $35 billion in debt and emerge as a revitalised telecom competitor as early as this autumn.

To date, MCI has agreed to pay $750 million in civil penalties for admitting to accounting fraud totalling as much as $12 billion.

It is also battling efforts by rivals to get the US government to disqualify MCI from keeping federal contracts worth over $1 billion a year.

Meanwhile, the conservative lobby group Citizens Against Government Waste renewed its call for the government to bar the company from federal contracts.

"The recent report of additional fraudulent acts by MCI is just one more reason why the government cannot trust the company with taxpayer dollars," CAGW President Tom Schatz said.

"They have cheated hundreds of thousands of investors out of 180 billion dollars and are now accused of cheating their competitors and the government. The government should immediately cease business with such a disreputable company."

The US Army is currently using a mobile phone network in Baghdad built by MCI. They are also  bidding on the lucrative Iraqi mobile network which is being put out to tender at a conference in Amman, Jordan later this week.