TCASII SHOWED INTRUDER AT SAME ALT ON COLLISION COURSE. RA COMMANDED RPTR ACFT TO DSND; WHICH THEY INITIATED WHILE AT THE SAME TIME CONTACTING ATC. ATC INFORMED FLC THAT INTRUDER WAS ACTUALLY 4000 FT LOWER THAN HIS XPONDER READOUT BECAUSE OF FAULTY MODE C. SINCE FAULTY MODE C GIVES FALSE ALT AND TCASII; IT SHOULD NOT BE USED WHEN IN ERROR.

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CLBING FROM FL320 TO FL330 ON J84 EBOUND 25 MI W OF SONNY INTXN; WE RECEIVED A TCASII TA ON AN ACFT 10 O'CLOCK POS AND COMING AT US ON AN APPARENT COLLISION COURSE. TCASII SHOWED THE OTHER ACFT LEVEL AT FL330. WE DISCONNECTED THE AUTOPLT AT FL328 IN PREPARATION FOR AN RA IF PRESENTED. WE RECEIVED THE RA AND I COMPLIED WITH COCKPIT DIRECTIONS TO AVOID TARGET. IT WAS A DSCND RA AND I PUSHED THE NOSE OVER AND DSNDED TO APPROX FL320. SIMULTANEOUSLY THE FO CALLED ATC (ZOA) TO ADVISE WE WERE MANEUVERING IN RESPONSE TO AN RA. ATC RESPONSE WAS THAT TFC IS LEVEL AT FL290 WITH A MALFUNCTIONING MODE C. IN RETROSPECT; I REMEMBER ATC ASKING AN ACFT (POS UNK TO US) ABOUT HIS ALT. THE CONVERSATION WENT SOMETHING LIKE THIS: ATC: 'ABC; WHAT IS YOUR ALT?' ABC: 'LEVEL FL290.' ATC: 'WELL YOUR MODE C SHOWS FL260.' ABC: 'OK; WELL WE WILL KICK IT AND SEE IF IT HELPS.' OUR INCIDENT OCCURRED APPROX 2-3 MINS AFTER THIS DISCUSSION. LESSON FOR ATC: IF A MODE C IS IN ERROR; DIRECT AN IMMEDIATE STOP ALT SQUAWK. OUR RA ON THIS MALFUNCTIONING MODE C DROVE US INTO; OR AT LEAST TOWARD THE CONFLICTING TFC.