Time Warner Inc. said yesterday that it would set aside $3 billion to cover a potential settlement with shareholders who lost billions of dollars because of its disastrous merger with America Online.

New York-based Time Warner posted its first loss in three years yesterday, largely because of a proposed settlement totaling $2.4 billion with the lead class of shareholders that is awaiting court approval. The shareholders claimed, among other things, that AOL's revenue was inflated by bogus advertising deals.

Time Warner, which paid $300 million to settle civil accounting fraud charges with the Securities and Exchange Commission and $210 million to settle a Justice Department investigation, established an additional reserve totaling $600 million in connection with related securities litigation.

The move acknowledges the unraveling of the AOL's 2001 purchase of Time Warner, which at the time was hailed as a futuristic merger between a new Internet giant and an old-line media company.

Dulles-based AOL is still the largest Internet service provider, though its dial-up subscriber base has declined significantly since the late 1990s. The company's early status as one of the first online powerhouses led to a huge run-up in its stock, and AOL wielded that market power by buying Time Warner for $112 billion to form the largest Internet and media company.

But financial restatements and a steady loss of customers diminished the online company's importance. Now it is Time Warner's cable television and high-speed Internet businesses that drive the company's growth. The company knocked the AOL name off its corporate logo in 2003.

"I don't think anybody can be terribly surprised with the fact that [Time Warner was] going to have some liability," said Rob Sanderson, media analyst for American Technology Research in San Francisco. Aside from the accounting problems, he said, "the question with the deal itself is: What were you thinking?"

Time Warner chairman and chief executive officer Richard D. Parsons said the proposed settlements are "important steps toward putting these matters behind us." Time Warner also said it authorized a $5 billion stock repurchase program over the next two years, designed to increase the value of its shares.

AOL lost 2.6 million U.S. subscribers in the past year. It reported 20.8 million subscribers at the end of the second quarter, down from 29 million in 2001. Revenue in that unit declined $80 million to $2.1 billion, primarily because of lost subscriptions.

AOL is trying to recast itself as an online advertising seller. It is pinning much of its hope for more advertising revenue on the recent launch of Web portal AOL.com, which last month hosted the worldwide Live8 concerts.

The filmed entertainment unit of Time Warner also suffered during the second quarter. It cited lower sales related to its "Lord of the Rings" movie trilogy, and lower syndication revenue from television shows such as "Friends" and "The Drew Carey Show."

Overall, Time Warner lost $321 million during the quarter, largely due to the money set aside for the settlements. In the second quarter last year, the company earned $777 million.

Revenue declined 1 percent to $10.7 billion. The losses in revenue from the AOL and filmed entertainment units were offset largely by gains in the company's cable business, which increased to $2.4 billion during the quarter, up from $2.1 billion. Subscriptions increased for high-speed data, digital phone and new services such as digital video recording. Time Warner also is in the process of buying assets from bankrupt cable company Adelphia Communications Corp., which will further expanded its reach.

Richard D. Parsons seeks to leave AOL's troubles behind.

America Online hopes to rebound as an advertising medium.