I definitely prefer and use “in line”, and based on user comments on here as well as other bits I’ve looked at it seems that “on line” originated in the New England area of the US.
Using the Google counting method of voting:
I don’t know when people starting using “on line”, but I actually think it was before the web became popular (I’ve seen it in books that are pretty old) but I started noticing it a couple of years ago and it still sounds rather awkward to my ears.
What’s your preference?
Update: I just woke up and noticed that the 2nd entry for the “stand in line” search was a “Dialect Survey” by the University of Wisconsin, Milwaukee Lingustics Department showing that most people prefer “in line.” Yeah, that’s right.
Update (11/29/2007): Reader Brendan pointed out that I didn’t quote each of my queries, which was especially important because “on line” is hugely popular. After doing that, “standing in line”clearly wins with about 1.4M results vs 32K for “standing on line.” Yeah, that’s right :)
Update (9/30/2009): Many commenters have pointed out that this seems to come up a lot in New York (and New England). I was just watching 2001: A Space Odyssey by Stanely Kubrick and Arthur C. Clarke, released in 1968. I noticed “on line” being used and looked up and it turns out that Kubrick was born in New York. So take of that what you will. This also is evidence that it is definitely not a new or recent phrase.
Update (11/10/2009): Added the actual quoted version of the links. This replaced the old versions that didn’t have the quotes: