ACFT Y WAS TOLD TO MAINTAIN VISUAL SEPARATION FROM ACFT X; WHOSE MODE C WAS DISPLAYING 5200 FT. UNKNOWN TO BOTH THE CTLR AND ACFT Y; ACFT X'S MODE C WAS MALFUNCTIONING; AND THE ACFT WAS ACTUALLY AT 6000 FT. THIS RESULTED IN AN NMAC.

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C172 WAS HANDED OFF FROM THE DEP CTLR ENRTE TO A SITE 6 MI NW OF TUS TO ORBIT AND TAKE PICTURES. THE DEP CTLR PRIOR TO THE HDOF HAD VERIFIED THE C172'S MODE C AND HIS REQUEST TO CLB TO 6000 FT. THE C172 CHKED ON MY FREQ BY STATING HE WAS WITH ME; AND MY RESPONSE WAS FOR HIM TO RPT ON STATION. I TOOK A HDOF FROM CTR ON AN MD80 INBOUND FROM THE E. THE MD80 RPTED ON FREQ WITH THE ATIS; ALT LEAVING AND ALT ASSIGNED. I ISSUED CTL INSTRUCTIONS FOR A VISUAL APCH INTO TUS. WHEN THE MD80 PASSED HIGHER TERRAIN TO THE E OF TUS; HE WAS INSTRUCTED TO DSND AND MAINTAIN 7000 FT AND WAS ISSUED TFC ON THE C172 12 O'CLOCK; 7 MI; MANEUVERING AT 5200 FT. THE C172 AT ABOUT THE SAME TIME RPTED 'ON STATION' AND WAS ADVISED OF THE MD80 E OF HIS POS DSNDING OUT OF 7300 FT INBOUND TO TUS. AT THIS TIME; FREQ CONGESTION STARTED BECOMING A FACTOR WITH MOSTLY GA ACFT. AFTER A COUPLE OF XMISSIONS TO OTHER ACFT; THE MD80 WAS DSNDED TO 6000 FT AND TFC WAS AGAIN GIVEN ON THE C172; 12 O'CLOCK; 3 MI AT 5200 FT. THERE WAS MORE CONGESTION ON FREQ AND I HEARD THE TAIL END OF THE MD80'S XMISSION. I ASKED HIM TO VERIFY THE C172 TFC IN SIGHT 12 O'CLOCK; 1 MI AT 5200 FT; AND HE SAID NEGATIVE. AFTER A 5 SECOND DELAY; THE MD80 THEN RPTED THE C172 IN SIGHT. THE MD80 WAS INSTRUCTED TO MAINTAIN VISUAL SEPARATION WITH THE CESSNA AND WAS CLRED FOR A VISUAL APCH WHICH HE ACKNOWLEDGED. THE MD80 THEN ADVISED EXCITEDLY THAT THE C172'S 'ALTIMETER' WAS WRONG AND THAT THE CESSNA WAS ABOVE THEM; NOT BELOW. WHILE LOOKING AT BOTH ACFT'S MODE C; THE COLLISION ALERT WENT OFF AND THE C172'S MODE C UPDATED TO 5800 FT. THE MD80 ASKED IF I COPIED THAT THE CESSNA'S MODE C WAS WRONG; WHICH I ACKNOWLEDGED. BY THIS TIME; TARGETS HAD PASSED AND THE MD80 WAS SWITCHED TO TWR. MY SUPVR HAD BEEN WATCHING THE WHOLE SCENARIO AND ASKED ME IF THE CESSNA'S MODE C HAD JUMPED FROM 5200 FT TO 5800 FT. I DIDN'T KNOW. AFTER A SUBSEQUENT INVESTIGATION; IT WAS DETERMINED THAT THE C172'S MODE C WAS INACCURATE. AFTER A PHONE CONVERSATION WITH THE SUPVR; THE C172 PLT SAID THAT HE HAD BEEN LEVEL AT 6000 FT THE ENTIRE TIME. HE ALSO STATED THAT HE HAD THE MD80 IN SIGHT THE ENTIRE TIME AND HAD ALSO TRIED TO GET PERMISSION TO DSND TO 5000 FT BUT WAS UNABLE TO GET THROUGH DUE TO CONGESTION. FREQ CONGESTION WAS A FACTOR; BUT OPENING ANOTHER POS WOULD HAVE BEEN INEFFECTIVE AS THE CONGESTION LASTED LESS THAN 5 MINS. IN HINDSIGHT; IF I WOULD HAVE ASKED THE C172 PLT IF HE WAS GOING TO STAY AT A LOWER ALT THAN REQUESTED; PERHAPS THE INACCURATE MODE C WOULD HAVE BEEN DISCOVERED. HOWEVER; THE BOTTOM LINE WAS; THE C172 HAD A BAD MODE C AND ALL PROCS FROM AN ATC POINT OF VIEW WERE FOLLOWED CORRECTLY.