Metro officials announced plans yesterday to install new Farecard machines at 16 key subway stations that will allow passengers to use $10 and $20 bills.

The transit system's older fare collection machines only accept $1 and $5 bills or coins. Officials said the modified devices would offer a convenience to many passengers, including commuters who take frequent rush-hour trips at relatively high fares.

Four of the new Farecard dispensers are scheduled to be put into service at the Pentagon rail station next week, probably starting Monday, for an initial test. An additional 28 machines are expected to be installed by the end of the year at heavily used downtown stations and suburban terminals.

Metro officials warned that the new devices are likely to reject $10 and $20 bills that are worn, crumpled, taped or torn, and they urged riders to use currency that is relatively clean and intact. Officials also said the machines will return a maximum of $4.95 in change, and all change will be in coins.

The new equipment is part of a long-range effort by the transit authority to improve its much-criticized, trouble-prone fare collection system. The authority said the new devices "are designed to far surpass the reliability" of older Farecard machines.

Metro officials currently are considering a multimillion-dollar plan to overhaul the existing equipment in an attempt to reduce breakdowns. The agency also has stepped up maintenance of Farecard machines.

Last year, it installed several "express vendors" that dispense $5 Farecards quickly and have no buttons to push. Metro recently raised the maximum value of its fare tickets to $30 instead of $20 to benefit long-distance commuters.

In other developments:

*Metro's board awarded an $11.6 million contract to Traylor Brothers Inc. of Evansville, Ind., to start constructing subway tunnels for the planned West Hyattsville station in Prince George's County. The project marks the first rail construction in the county in five years. Ground breaking is scheduled for Saturday.

*Officials said they are considering replacing upholstered seats with fiber glass in the rear section of Metrobuses in an attempt to reduce graffiti and other vandalism. Fiber glass is easier to clean and less susceptible to damage than upholstery, officials said, and vandalism is most frequent in the rear section, which is difficult for drivers to monitor.

*John S. Egbert, formerly Metro's assistant general manager for design and construction, was promoted to deputy general manager. He replaced Theodore G. Weigle Jr., who resigned last month to take a post in Chicago. James M. Miller, previously executive officer, was named secretary of the authority.