B737 FLC AND MCO LCL CTLR COME TO REALIZATION THAT CLRNC WAS MISINTERP AND ACFT ON FINAL ISSUED GAR.

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DURING TAXI OUT; AS WE WERE COMPLETING OUR BEFORE TAKEOFF CHECKS; THE TOWER ASKED US IF WE WERE READY FOR AN IMMEDIATE TAKEOFF (READY TO GO). WE RESPONDED THAT WE WERE. AT ABOUT THE SAME TIME THE TOWER GAVE US OUR CLEARANCE; THE FLIGHT ATTENDANT CALLED WITH THE NEW PROCEDURE VIA THE INTERPHONE THAT SHE WAS READY. I HAD TROUBLE HEARING THE FLIGHT ATTENDANT (PURSER) AND HAD TO TURN THE VOLUME UP. DURING THIS TIME; THE FO RESPONDED TO THE TOWER TO HOLD SHORT. I MISTAKENLY HEARD 'POSITION AND HOLD.' SINCE THIS MADE SENSE WITH ARE 'YOU READY TO GO;' WE (FO AND CAPT) BOTH THOUGHT THE INSTRUCTIONS WERE ODD. THE FO MADE A COMMENT AND I ALSO MADE A COMMENT; SINCE THERE WAS A PLANE ON 3 MILE FINAL. I WAS THINKING HURRY; AND HE WAS BUSY DOING THE REST BEFORE THE CHECK. I STOPPED THE AIRCRAFT; LOOKING AT THE ACFT ON FINAL AND REALIZED IT WOULD NOT WORK OUT; SLIGHTLY OVER THE LINE FOR HOLDING SHORT; ABOUT THE TIME THE FO WAS SAYING 'AREN'T WE SUPPOSED TO HOLD SHORT?' I NOTIFIED THE TOWER THAT WE WERE ACROSS THE LINE AND THEY SENT THE ACFT ON FINAL AROUND. SUPPLEMENTAL INFORMATION FROM ACN 525222: AS WE MADE THE TURN JUST PRIOR TO THE HOLD SHORT LINE; I BEGAN TO SPEAK UP. THE CAPT HAD ALREADY BEGUN APPLYING THE BRAKES; AS HE RECOGNIZED THAT IT WASN'T GOING TO WORK OUT. WE WERE A FEW FEET OVER THE LINE. THE CAPT IMMEDIATELY NOTIFIED THE TOWER AND THEY SENT THE OTHER AIRCRAFT AROUND.