International Bank of Washington, a diversified financial service company, yesterday accused the accounting firm of Price Waterhouse and Co. of concealing the insolvency of a subsidiary bank the Washington firm operated in the Bahamas.

In a lawsuit filed in U.S. District Court, New York, International Bank asked for about $9 million in alleged damages.

Yesterday's decision to go to court apparently ended private negotiations between International Bank and Price Waterhouse over a possible settlement of the matter.

Spokesmen for both firms said there had been discussions, but a Price Waterhouse official said he wouldn't characterize the talks as formal negotiations. Other than that, Price Waterhouse declined comment on the unusual lawsuit until officials of the accounting firm have studied the allegations.

Involved in the dispute is the financial collapse of Mercantile Bank and Trust Co., Litd., a commercial bank in Freeport. The Bahamas, IB owned two-thirds of the Freeport bank's stock but has been liquidating the Bahamas institution since an internal investigation earlier this year revealed that the bank had been insolvent for some time.

The lawsuit also deals with the responsibility of a major U.S. accounting firm - Price Waterhouse is one of the so-called Big Eight accountants - for the work and stated financial opinions of a legally independent offshore company, such as the Bahamas Price Waterhouse partnership.

in the view of International Bank, the Washington company each year received unqualified statements from Price Waterhouse in the Bahamas certifying were solvent. These statements were accepted and incorporated into the Washington firm's overrall accounting, supervised by another Big Eight firm, Arthur Andersen & Co.

But Internationl Bank discovered this year that the listed value of certain Mercantile bank loan collateral was inadequate to cover liabilities and announced a liquidation. Subsequently, Price Waterhouse withdrew its financial opinions for the years 1973, 1974 and 1975 and said they could not be relied upon.

A speical reserve of $7.5 million - after tax benefits of $1.3 million - was established by the Washington company to cover potential losses from the Bahamas operation: $5.7 million was charged against 1976 earnings.

The lawsuit filed yesterday lists 16 specific claims of alleged violations of federal securities laws or common law by Price Waterhouse.

International Bank alleged that Price Waterhouse partners in the Bahamas "entered into a conspiracy and scheme to conceal and cover up the existence of . . . uncollectable loans in order to avoid insolvency and to defraud third parties . . ."

At one point, a straw company was formed to enter into a "sham purchase" of the bad loans from Mercantile at face value, International Bank alleged.

All the while, clients of Price Waterhouse in the Bahamas were placing substantial deposits at the bank, the lawsuit said. Many of the purported loan transactions at the bank were actually investment transactions in companies the bank owned, managed or controlled.

According to the lawsuit, Price Waterhouse officials "knowingly" permitted use of "false" financial statements and "deliverately" refrained from informing the Washington company about the true nature of the bank's condition.