AT&T Corp. (T), the largest U.S. long-distance telephone company, said on Thursday it has set aside $553 million to cover costs stemming from a ruling by the Federal Communications Commission (search) against the company's prepaid calling card business.

Last month, the FCC unanimously ruled that AT&T wrongly avoided paying connection fees and charges to subsidize other telephone services since 1999 on some prepaid calling cards.

In a filing with the Securities and Exchange Commission (search), AT&T said it set aside the $553 million at the end of December. It also said Qwest Communications International Inc. (Q) had filed a federal lawsuit over the unpaid charges, seeking unspecified damages.

AT&T said in the filing it would contest the decision in court, and has previously argued the ruling would likely lead to a 20 percent rise in rates for the cards.

It had contended that because the cards included an "enhancement" — usually an advertisement to users before their calls were connected — the cards were exempt from connection charges and contributions to the Universal Service Fund, which subsidizes phone service in rural communities and to low-income families.

AT&T's cards typically offer the lowest rates for long-distance service, about 3 cents a minute. That has made them popular among U.S. military families and troops deployed in Iraq and Afghanistan.

UBS telecommunications analyst John Hodulik has estimated AT&T's prepaid card business generates approximately $900 million in annual revenue, representing roughly 10 percent of its consumer revenues in 2004.

AT&T said more than half of the revenue from the cards comes from a contract with Wal-Mart Stores Inc. (WMT) which Wal-Mart can terminate under some circumstances if AT&T raises rates on the cards.