Eastmet Corp., the financially strapped Baltimore steel manufacturer, announced the election to its board of directors of a New York investor who had sued the company after his proposal to buy one of Eastmet's divisions fell through.

Richard E. Gray agreed in return to drop his lawsuit stemming from Eastmet's cancellation of an agreement to sell its Industrial Products Group to Gray's holding company, Eastmet said. The company also said it appointed Stuart J. Benton, a Gray associate, to head this division, which Eastmet said will remain as part of the ongoing business.

The election of Gray, the company's largest stockholder, may signal the beginning of new efforts for the company to escape its financial difficulties.

The company filed in January for protection under Chapter 11 of the federal bankruptcy code, which allows it to continue operations while it negotiates a plan of reorganization with its creditors. The company sustained massive losses in 1985, and it recently decided to shut down its stainless-steel sheet and strip business to concentrate on steel plate.

William F. Dausch, Eastmet's president, said Gray, an attorney who owns other manufacturing companies, will assist the company in developing a business and financial restructuring plan. Gray "has a lot of good ideas . . . The board agreed that he could bring something -- assuming that he dropped his lawsuit," Dausch said.

Gray said yesterday he has been buying Eastmet stock since early last year, going over the 5 percent mark after his agreement fell through last summer to buy the Industrial Products Group, Eastmet's profitable assemblage of metals and plastics firms.

He said he considers Eastmet's stock, which was trading yesterday at a bid price of 1 1/4, to be undervalued despite the company's problems. He said the company can return to profitability, and he added that he has sought to push management to make changes toward that goal. Gray noted that he has sought to diffuse tensions between the company and the United Steelworkers of America, the union representing many of Eastmet's workers.

Although Gray said he intends to buy more Eastmet stock, he stopped short of saying whether he intended to launch an effort to take over the company. He said this is a possibility, but not a certainty.

"The first step right now is to make sure that there's something good to be taken over," said Gray, whose companies report combined annual sales of $350 million.