The service, which will offer computer games, community bulletin boards, chat lines, sports results and educational services, will be the company's first diversification since it launched in 1983.
It is also considering launching video-on-demand, a dial-up movie service, although this is not an immediate priority.
A Mercury insider says it will pilot the new service in a large city, probably London, in the autumn, with a nationwide roll-out later.
''There is no question about launching it, it is just a matter of determining pricing and factors like that,' he said.
The service, which is aimed at home computer users and business customers, will require subscribers to have a modem to hook up to it. But Mercury is considering giving these away or selling them at substantial discounts to kick- start the market.
The launch of the service follows Mercury's acquisition earlier this year of a 37 per cent stake in M33, a multimedia company that publishes interactive products under the name Andromeda Interactive.
The pounds 3.75m deal gave Mercury on-line distribution rights to products such as Classics Library, an electronic library of 2,000 titles ranging from Shakespeare videos to Bram Stoker's Dracula.
The foray into multimedia comes as both Mercury and British Telecom race to create new revenue streams from non-telecommunications services. Last year, Mercury set up a new division, New Media Entertainment, to exploit the opportunities.
Experts widely predict that competition will be so fierce in the next century that telecoms operators will make more money from entertainment services, because of the squeeze on margins earned from telephony services.
BT has already launched a trial video-on-demand in Suffolk. Cable and Wireless, Mercury's parent company, is running a similar pilot in Hong Kong, where it runs the telephone network.
However, Mercury will almost certainly wait to see if it can get approval to hook into BT's video-on-demand storage centres before taking the plunge in the UK.Reuse content