NEW YORK (AP) – New York state filed a $250 million fraud suit Wednesday against H&R Block, the nation’s largest tax preparation service, charging the company steered more than 500,000 customers into a money losing retirement account plan.

News of the lawsuit by Attorney General Eliot Spitzer, filed just as tax season gets into full swing, unnerved investors, who caused H&R Block shares to plummet by $1.54 – down 7 percent – to $20.46 in morning trading on the New York Stock Exchange.

The lawsuit, filed in Manhattan’s state Supreme Court, says Block advised clients to buy an “unsuitable, fraudulently marketed, poorly performing, fee-ridden retirement vehicle’ called the Express IRA,” an account that actually shrinks over time.

Court papers say the amount of money in the retirement account decreases because the only investment option is a money market account with an interest rate so low that it does not cover the fees – “fees that H&R Block fails to adequately disclose.”

Those charges included a $15 setup fee, a $15 “recontribution” fee and a $10 annual maintenance fee, and the accounts earned low interest that almost never covered the fees, Spitzer said.

Customers “paid more in fees than they got back in interest,” said Spitzer, a Democrat who is leading a field of candidates for governor. “They were not told this would happen. This is a violation of state law.”

“They did not have the decency or the sense of fairness to disclose to these low-income clients that the fees that were imposing would necessarily outweigh the interest that was being paid on these accounts,” Spitzer said at a press conference.

H&R Block issued an immediate and strong reply to Spitzer’s attack, saying the company will “fight vigorously to defend the Express IRA product and ensure it remains available to our many clients who rely on it as a helpful savings option.”

“Make no mistake – we believe in the Express IRA product and are proud of the opportunities it presents for our clients,” said Chairman and CEO Mark A. Ernst.

Spitzer, taking a swipe at Block’s legal woes – “having a little trouble calculating their own taxes” – said the company’s alleged deceptions were more farsighted than merely the fees it got for opening and maintaining the losing IRA accounts.

“The real reason they set up these accounts was that once their clients had these accounts, they would continue to come back to H&R Block to have their taxes done,” the attorney general said. He said the company considered the IRA accounts “bait.”

Sarah Ludwig, director of the Neighborhood Economic Development Advocacy Project, said at the press conference that Block’s Express IRA was part of an array of “deceptively marketed, high-cost junk products” aimed at low-income, working class families.

The attorney general’s lawsuit asks that the company be required to stop engaging in any fraudulent practices, that the company be forced to disgorge profits and pay damages and restitution caused by its alleged scheme, and that it pay civil penalties in an amount no less than $250 million.

Spitzer said that H&R Block opened more than half a million Express IRA accounts in the last four years. He said 85 percent of customers who opened the accounts paid H&R Block more in fees than they earned in interest.

More than 150,000 customers closed their accounts, incurring additional undisclosed fees and almost $6 million in tax penalties, Spitzer said.

The investigation by the attorney general’s office was launched in 2005 after it received information from an H&R Block tax preparer.