A federal bankruptcy court Wednesday approved a deal under which WorldCom Inc. will pay Verizon Communications $34.5 million in debt and a billing agreement will be extended through 2003.

In the course of business, local telephone company Verizon billed and collected charges for about 2 million WorldCom long- distance customers, but WorldCom fell behind on the fees it paid Verizon for the service.

Their contract was set to expire on Sept. 10, but the two communications companies agreed to settle the unpaid debt and extend the contract until Dec. 31, 2003.

WorldCom, which filed for bankruptcy on July 21, hopes to emerge from bankruptcy in the first quarter of 2003.

In response to a question from Judge Arthur Gonzalez the company's lawyers said on Wednesday the company is working as quickly as possible with creditors on its reorganization plan.

The court also approved the telecommunications company's retention of law firms for regulatory and litigation purposes.

Wednesday's hearing was originally scheduled to include a final examination of WorldCom's debtor-in-possession financing package. This hearing has been postponed until Oct. 1.

Lawyers for WorldCom said the lenders decided to delay the hearing because of the Labor day holiday. The new schedule gives bankers more time to extend the pool of participants in the financing package.

WorldCom was initially seeking up to $2 billion in funding to operate while in protection from its creditors, but has scaled back to between $1.25 billion and $1.5 billion because of a better cash position, company spokeswoman Julie Moore said.

The financing package was provided by Citigroup, J.P. Morgan Chase & Co. and General Electric Co.'s GE Capital financing arm. WorldCom filed for protection from its creditors July 21, listing $41 billion in debt and $107 billion in assets.

The company succumbed to bankruptcy after uncovering $7.68 billion in accounting errors on its books. WorldCom is the No. 2 U.S. long-distance telephone company and one of the world's largest carriers of Internet traffic.

Separately, WorldCom sought permission to pay $36 million in severance, including wages, commissions and other funds, owed to 4,143 employees who were fired before the company entered bankruptcy protection, according to a court filing.

The company initially was authorized only to pay the employees the maximum allowed under the law, $4,650, but since they were let go before the bankruptcy filing, they qualified for a bigger payout, according to WorldCom.

On June 28, the company notified about 8,070 employees that they were terminated or would be fired in the coming months. WorldCom had about 63,900 employees as of June 30.

Also on Wednesday, WorldCom became the target of yet another new legal challenge as Ohio Attorney General Betty Montgomery said the state would sue WorldCom separately for losses in its pension funds and workers compensation.

Ohio has opted out of the federal class action lawsuits against WorldCom and another fallen giant, Enron Corp. , and instead will pursue action in state court, she said.

WorldCom spokeswoman Julie Moore declined to comment