Palestinian terrorist Abu Daoud said today that he is willing to testify before a West German court on his innocence in the Munich Olympics massacre. But he said his safety must be guaranteed and arrangements must be made through the Palestine Liberation Organization.

"I would go immediately. I would take the first place," Daoud said in telephone interviews from Fatah headquarters in Algiers.

In Bonn, Justice Ministry officials said privately that they did not take Abu Daoud's offer seriously.

"Personally I think he's trying to make fools of the West Germans," one official said.

A spokesman at the Justic Ministry said:

"If he wants to face trial he should let the Bavarian justice authorities know and travel to Munich. He could of course have flown to Munich instead of Algiers on Tuesday. He cannot expect us to sent him an official invitation."

West Germany and Israel had asked France to hold Abu Daoud for possible extradition after he was arrested in Paris more than a week ago. A French court, after deliberating for 20 minutes, rejected those countries' requests and freed Abu Daoud last Tuesday. He was flown immediately to Algiers.

West German police say they have proof Abu Daoud was at the hotel used by Palestinian raiders just before they launched the 1972 attack in which 11 Israeli Olympics athletes were killed. They said the warrant that led to Abu Daoud's arrest in Paris was based on this evidence.

"I am innocent and I think the charges against me are a fabrication invented by the Israelis and the Zionist." Abu Daoud said, "I want to go to Germany to show the world I am innocent," he said. "But first the Germany government must promise me that I will receive protection."

Asked whether he was confident a West German court would find him innocent of the Munich mssacre, in which the 11 Israeli athletes, one West German policeman and five Palesitnians were killed, Abu Daoud replied:

"Yes . . . That is, if they have a just system. If they have a justice thing like the French courts."

Calm and relaxed in the security of the Algerian capital, Abu Daoud is being treated like a hero, complete with black limousine and motorcycle escort, according to a UPI correspondent who interviewed him in an office crowded with eight PLO members and Algerian officials.

Meanwhile in New York, a conference of major Jewish grops said that "thousands of members" of its constituent agencies are calling for a ban on travel to France and a boycott of Abu Daoud.

In other Middle East developments:

Representatives of 20 Arab League states began a three-day conference in Cairo to work out a plan for economic cooperation with Europe. The outcome will be the basis for a Feb. 10 conference in Tunisia with Common Market representatives.

Egypt and Sudan signed a military agreement that officials in Cairo said was aimed at discouraging dissidents living in Ethiopia from invading Sudar.

King Hussein of Jordan and Egyptian President Anwar Sadat ended three days of talks in Caior and called for a resumption of the Geneva Middle East conference.