C172 INSTRUCTOR PLT; WITH INST TRAINEE; OVERSHOT DEP ALT DUE TO WRONG ALTIMETER SETTING RESULTING IN A CONFLICT WITH ANOTHER ACFT.

Narrative

DEPARTED HFY ON IFR FLT PLAN FOR IFR TRAINING. STUDENT HANDLING CTLS AND ALL RADIO COM. IFR STUDENT MISS-SET ALTIMETER SETTING TO 1000 FT BELOW FIELD ELEVATION. I ALLOWED THIS TO OCCUR AS A TRAINING OPPORTUNITY. PICKED UP IFR CLRNC IN AIR SHORTLY AFTER TKOF. CLRNC INCLUDED CLB TO 3000 FT. WE WERE PROCEEDING E ON 090 DEG HDG. CTLR ADVISED OF WBOUND TFC AT 12 O'CLOCK AT APPROX 3000 FT. STUDENT BELIEVED OUR ALT TO BE 2100 FT AND CLBING DUE TO PREVIOUSLY MENTIONED ALTIMETER ERROR. I ALLOWED SIT TO CONTINUE; WATCHING FOR THE ONCOMING TFC. STUDENT HAD RPTED OUT OF AN ALT (APPROX +/-2000 FT) FOR 3000 FT; AS PER STANDARD PROC. CTLR INDICATED HE HAD US AT 3000 FT; BUT SIGNIFICANCE OF CTLR STATEMENT NOT NOTICED BY STUDENT. I CONTINUED TO ALLOW THE SIT TO DEVELOP; STILL LOOKING FOR THE 12 O'CLOCK TFC THAT I KNEW TO BE AT OUR ACTUAL ALT; AND LIKELY VERY DIFFICULT TO SEE IF IT REALLY WAS AT 12 O'CLOCK POS AND EXACTLY OPPOSITE DIRECTION (WHICH IT ACTUALLY TURNED OUT TO BE). CTLR SAID TO US; 'TFC AT 12 O'CLOCK POS; (DON'T REMEMBER) DISTANCE; TURN L TO 360 DEGS.' STUDENT CONTINUED CLB AND WAS PLANNING TO TURN EVENTUALLY; BUT DID NOT INITIATE TURN AS PROMPTLY; AS GOOD PROCS WOULD REQUIRE. I CONTINUED TO ALLOW THE SIT TO DEVELOP; WATCHING INTENTLY FOR THE ONCOMING TFC. JUST AS I SAW THE TFC AND TOOK THE CTLS AND INITIATED THE AVOIDANCE TURN (TFC AT 12 O'CLOCK POS; APPROX 1 MI; HEAD-ON); THE CTLR ISSUED 'TFC ALERT! TFC ALERT! TURN L 360 DEGS.' SOMEWHERE DURING THIS TIME; I THINK AFTER THE TFC ALERT; I INDICATED WE HAD THE TFC AND WERE TURNING TO 360 DEGS. ON 360 DEG HDG; I GAVE THE CTLS BACK TO THE STUDENT WHO CONTINUED TO CLB. I ALLOWED THIS TO CONTINUE. AT 3600 FT MSL AFTER COM EXCHANGES WITH THE CTLR; THE STUDENT REALIZED THE ALTIMETER ERROR; RESET IT AND DSNDED TO 3000 FT. I ALLOWED THE ALT VIOLATION TO OCCUR; BUT IT MAY HAVE CONTRIBUTED TO THE TFC ALERT SIT THAT DEVELOPED.