Conoco Inc. yesterday urged its shareholders to reject an offer by Seagram Co. Ltd. to buy up to 41 percent of the company and filed a $1 billion damage suit against the Canadian company.

In a letter to shareholders, Conoco chairman Ralph E. Bailey said Seagram's $73-a-share offer didn't reflect the true value of Conoco and "was not in the best interests" of the shareholders.

Conoco's lawsuit against the Canadian liquor company charges that Seagram's cash offer last Thursday broke up a planned merger between Conoco and Cities Service Co., the energy company based in Tulsa, Okla. According to Conoco, Cities Service withdrew following Seagram's offer, although the proposed merger had been questioned by the Justice Department's Antitrust Division.

The Conoco announcement was made following the close of trading yesterday on the New York Stock Exchange, where Conoco was the most active stock, falling 37 1/2 cents to $65.50 a share, with more than 1 million shares traded.

In a separate development, Consolidation Coal Co., a Conoco subsidiary, yesterday announced a $100 million venture with a West German firm to ship Pennsylvania coal to West Germany through a new terminal in the Port of Baltimore, increasing the port's total coal shipments 20 percent by 1987.

Consol, the nation's second-largest coal producer, said it will develop a new underground coal mine in southwestern Pennsylvania to supply 2.5 million tons a year to a major West German mining company, Braunkohlenwerke AG (Rheinbraun), for use as power plant fuel.

The initial Consol mine is expected to be producing coal by 1984 with full production scheduled in 1987. Consol will build a major new coal-shipping terminal at the Canton Marine Terminal, Pier 2 in Baltimore Harbor, a former iron ore importing area near Newgate Avenue west of Haven Street. A Consol spokesman said the company hopes that the long-debated, long-delayed plans to deepen the harbor by dredging will be carried out, although Consol is prepared to use smaller ships for coal delivery if the current impasse isn't resolved.

Consol Chairman R .E. Samples said that eventually its German partner may purchase as much as 12.5 million tons, worth $500 million in today's prices. The production will come from Concol's Manor/Ninevah reserve, which holds an estimated 360 million tons of recoverable coal. Both the Chessie railroad systems and Conrail are expected to provide delivery.

Consol will have a 76 percent interest in the joint venture, with Rheinbraun receiving a 24 percent equity participation. The German firm will receive a 24 percent equity share of the first mine's production and an additional 24 percent under the sales agreement, Consol said.

Baltimore's coal exporting terminal has been operating at full capacity since 1980. Although all cargo shipments declined slightly in 1980 compared with the year before, coal exports jumped from 9.2 million tons in 1979 to 12.2 million tons last year and are still increasing, according to port officials.