MD80 First Officer missets altimeter by 1000 FT and Captain does not catch error until aircraft descends below assigned altitude entering holding. Aircraft is quickly brought back to assigned altitude as TCAS traffic alert sounds. Altimeter set at 30.16 instead of 29.16.

Narrative

Episode occurred in April at around XA30L. We were proceeding from holding at MIP to holding at LIZZI while trying to get into LGA behind a fast moving storm. We were given a descent to 13;000 FT with an altimeter of 29.16. Very low altimeters were associated with this system. The pilot flying mis-set his to 30.16 and neither one of us caught it in the business of setting up for another holding. I remember looking at it during the initial crosscheck through FL180 and seeing the .16 and continued with my tasks. The altimeter sweep hands looked normal since they were precisely 1;000 FT apart. Since I had the correct altimeter setting on my side; I was the one to notice we had gone through our cleared altitude. When I noticed; we were at 12;600 FT; about 400 FT low. We queried the Controller to confirm the true setting and expedited back to 13;000 FT. As we got to 13;000 FT; another aircraft was approaching us and passed almost directly underneath at 12;000 FT! We received a TCAS TA but no RA.