DA20 FLT CREW INBOUND TO SJC AND LEAVING THE HOLDING PATTERN; MISSED ATC INSTRUCTION; THAT RESULTED IN POTENTIAL CONFLICT AT 5550 FT.

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FLT INBOUND FROM MHT TO SJC; ARR PHASE OF FLT. APPARENTLY THERE WAS AN ACFT INBOUND TO SJC AT AN UNKNOWN POINT IN FRONT OF US. WE WERE GIVEN HOLDING INSTRUCTIONS AT GILRO; IAF FOR ILS RWY 30L AT SJC. CLRED TO HOLD AT 10000 FT MSL. I SLOWED THE ACFT DOWN TO 160 KTS. AT GILRO WE WERE THEN GIVEN HDG AND DSCNT TO 8000 FT. THEN ANOTHER HDG AND CLRNC FOR VISUAL APCH TO SJC RWY 30L; THEN GIVEN A NEW APCH FREQ 120.1. ONCE ON THE LCL APCH CTLR'S FREQ WE WERE ISSUED TFC ON L DOWNWIND TO FOLLOW AND HAD HIM IN SIGHT. THEN WE NOTICED ANOTHER AIRLINER ON R DOWNWIND APPARENTLY GOING TURN BASE IN FRONT OF US AND SLIGHTLY BELOW. WE WERE ABOUT TO QUERY ATC ON THIS TFC WHEN ALL OF A SUDDEN ATC SAID TURN L HDG 230 DEGS AND MAINTAIN 6000 FT. WE WERE ALREADY DSNDING THROUGH 5600 FT. SO I QUICKLY DISCONNECTED THE AUTOPLT AND PITCHED UP AND BANKED L. WE HAD THE OTHER TFC IN SIGHT THE WHOLE TIME AND WAS NEVER CLOSE ENOUGH TO IT TO SET OFF THE TCAS. I DON'T THINK WE GOT CLOSER TO IT THAN 2 OR 2 1/2 MI. THE CTLR ASKED IF WE HAD HEARD HIS PREVIOUS INSTRUCTIONS TO TURN AND MAINTAIN 6000 FT. WE; PNF SAID; NO; WE HAD NOT. THEN WE WERE CLRED ONCE AGAIN FOR AN UNEVENTFUL VISUAL APCH AND LANDED.