The abandoned Continental Can Co. factory in East Baltimore doesn't look like much. Just a dingy, rust-streaked building of faded green, on and out-of-the-way street tucked behind the kind of neon-lit industrial highway found in any big old eastern city.

It doesn't look like the kind of place that would figure prominently in the resignation of a Maryland prison official, that would provoke bitter protests from two neighboring communities or give rise to new questions about political favoritism in Maryland's government.

But with unusual haste - justified in the view of some state officials by Maryland's severely overcrowded prisons - the state has moved to convert the old can factory into a medium-security prison.

In the process, Gov. Marvin Mandel's office has bypassed the normal channels for securing and negotiating a lease on the building and has had the word done within the governor's office. When the dust finally settles, Morton Sarubi, a relative of Mandel's principal political patron - Irvin Kovens - may realize, a profit of more than $1 million in state money.

At least one state prison official felt so strongly that the negotiations were not carried out in the best way that he has quit his job.

"I'm one of those people who believe government should be open and involve people and I just have some problems with some of the things that have gone on," said William Lamb, who resigned his job as of Tuesday as head of a state community corrections program in Baltimore. ". . . It may be the best location in the state . . . but I along with everybody else, have questions about the procedures and some of the relationships involved," he said.

At a budget hearing, Alan Wilner, Mandel's top aide, angrily asserted that Sarubin's family connections had bothing to do with the Continental Can proposal.

"We went through a rather ardous process to come up with this," Wilner told the committee. "This administration will not be in office when the real (prison overcrowding) problem hits.

"We (Mandel's administration) could get by. We've taken a lot of heat on this. Now, if the legislature doesn't like it, come up with something more feasible."

The story begins with Continental Can Co.'s decision to seek a location nearer to the South American tin it uses in its cans. The company put its Baltimore factory on the market, but for more than a year there were no buyers.

Finally, last August, the factory was purchased by a partnership headed by Sarubin, a Baltimore developer who is the cousin of Kovens. Kovens is Mandel's most important fund-raiser, and a codefendant in Mandel's interrupted political corruption trial, scheduled for a replay beginning April 13.

Sarubin paid $4 million for the 34-acre tract on which the can factory and several other buildings are located. A nine-acre parcel on which Contintal Can is still doing some limited manufacturing accounted for $2.1 million of the price; the other 25 acres, where the proposed prison building sits, cost Sarubin $1.9 million.

On Dec. 3, less than five months after Sarubin paid $1.9 million for the 25-acre site, the state entered into a lease-purchase arrangement with him, under which Sarubin will receive a minimum of $3 million and a maximum of $4.5 million for the property, subject to the approval of legislature.

In testimony before a General Assembly budget subcommittee this week, Sarubin said he bought the building with the intention of leasing it to industrial tenants, and is not entirely satisfied about the arrangement he made with the state.

Wilner said the state first became aware of the possibility of using the Continental Can factory as a prison in October, when a Baltimore realtor whom Mandel's office had asked to search out possible prison sites in Baltimore, brought it to his attention.

Within two months, the negotiations between Sarubin and Wilner were concluded, with the state committed to the seven months of payments to Sarubin.

At the time the state concluded the deal, officials apparently had no idea how much it would cost to renovate the building. At a meeting in an East Baltimore church in December, Del. John W. Douglas (D-Baltimore), produced a Department of Generalk Services estimate that renovating the factory would cost $25.7 million.

Wilner, who was at the meeting, denied that the cost would be so high. But when Mandel submitted his proposed budget for next year to the legislature, said Del. Douglass, "lo and behold, they put in the budget the exact same amount I said it would cost." The actual figure in the budget is $26 million.

Even if the legislature does not approve the lease, Sarubin will receive almost $500,000 from the state to hold his building open.

Del. Charles J. Krysiak, a Baltimore Democrat whose constituents are up in arms about the proposal to put a prison in their neighborhood, called it "a deal uparalleled since the last successful attempt to sell the Brooklyn Bridge."

The state agreed to pay Sarubin $25,000 a month in rent, and about $5,000 monthly to cover his taxes, for the seven-month period between the signing of the lease and the time the legislature acts on the proposal.

The arrangements was made by the Board of Public Works, which consists of Mandel, the state comptroller, and the state treasurer. The board set aside $209,583 in emergency funds to pay the rent between December and July.

The legislature's fiscal analyst said last week that "the lease requires the state to pay all utility, maintenance, and repair costs" in addition to the rent. The additional costs, the analyst said, are estimated at $225,152 for the seven-month period.

"This was done with a gun to my head," Sarubin told the Joint Subcommittee on Law Enforcement and Transportation Thursday. "When we started negotiations - by the way, I had no idea the state was looking for a (prison) facility, this was not a contrived prearrangement or anything - Alan (Wilner) came to me and said, . . . 'If we leak to the press that we might condemn the property, nobody is going to sigh your leases.'"

Wilner, who was in the committee room with Sarubin, turned red-faced at Sarubin's recounting, but did not deny his story. Later, he amplified it, with subtle changes in emphasis:

"There came a point in the negotiations where he was asking more than we were willing to pay, and saying he had all these leases," Wilner said. "So I said, 'No if we threaten to condemn it!'"

Like that episode, the entire negotiation between Sarubin and the state was carried out by Mandel's office, rather than by the Department of General Services, the state agency that usually negotiates leases and contracts.

"This was definitely not handled by this department," said a Geneal Services official. "We were never into this thing. This is out of our league."

The lease itself was written largely by Wilner, and reviewed by the attorney general's office only for "form and legal sufficiency," according to Attorney General Francis B. Burch. Burch said it is not unusual for leases to be drawn up before his office sees them.

At the hearing, Wilner was asked why George Services was left out of the process of negotiating the lease. "I wouldn't say anybody was left out of this thing" he replied. "This is a very expensive subject, a very sensitive subject. All of this was drawn together, and done the best way we could."

There is no doubt that Maryland needs additional prison facilities. On Dec. 1, Maryland jails had room for 5,025 inmates, according to the American Correctional Association, the leading national prison-rating organization.

That day, though, Maryland had 8,064 prisoners, of whom 1,107 were crowded into local jails; 2,820 were double-bunked in cells built for only one person, and 652 were sleeping on bunks in dormitory or recreation areas, according to figures from Mandel's office.

Repeated efforts to establish new prison facilities - in a mothballed Navy troopship, a dilapidated Army stockade, unused trailers, and other unlikely places - have failed.

The Continental Can site is said by proponents to be an excellent place for a prison. The building is sound and easily secured, even if old, prison experts say. There is room to provide recreation for prisoners, and space to expand if the state needs additional prison facilities later.

About the only problems with the location are the community of two-story, brick row houses visible from the front of the can factory, and the neighborhood behind the factory.

The two East Baltimore neighborhoods are unlikely partners in protest. One is a blue-collar, white-ethnic area. The other is described by one of its state representatives, Sen. Robert Douglas (D-Baltimore), as the most stable, heaviest voting, and most homeowner-occupied black neighborhood in East Baltimore.

"These are two very stable neigborhoods," said Pat DiCarlo, a leader of the protest in Orangeville, the white area. "If they put this thing in here, young homeowners will move out, absentee landlords will come in, and it will become a community of renters.

"About 20 years ago, the black people over in Kenwood paid exorbitant sums - $30,000 each for row houses - and now all of a sudden they feel threatened," she said.

"This may all be technically legal, but morally and ethically it stinks."

Some state legislators from East Baltimore are not so sure the Continental Can deal is even legal. Krysiak said the lease arrangement has "the kind of stench no amount of political double-talk can cover up."

Del. John Douglass, who represents Kenwood, said he has a "very strong" feeling there are irregularities in the lease arrangement. Douglass thinks he has located at least one - a state law stipulated Maryland may not pay more than 15 per cent of the assessed value of a building in any one year to lease the building.

Maryland has the option either to lease or purchase the Continental Can facility from Sarubin. If the state decides to lease, the annual fee would be $300,000, according to the agreement between Sarubin and the Board of Public Works.

Baltimore assessor S. Floyd Shenk put a value of $1.9 million on the building when he assessed it last year. Fifteen per cent of the factory's assessed value is $286,605, or about $13,000 less than the amount the state has agreed to pay Sarubin as a lease fee.

However, a more recent state-funded appraisal of the factory put its value at $3 million. Sarubin added to the confusion about the factory's value by saying at the budget hearing that neither amount was the correct value.

"We paid $4 million for the two (nine acre and 25 acre) properties, one of which we leased back to Continental Can for 15 years," Sarubin said. The true value of the factory, he said "basically resolves itself to what happens to the Continental Can lease . . . There's no way to evaluate a price."

Sarubin said the prices he assigned to the two tracts - $2.1 million for the nine acres where Continental Can is operating out of a relatively new factory and $1.9 million for the 25 acres with the abandoned factory - were made "with no rhyme or reason . . . I really did not want to sell it," he said in response to a question from Sen. Meyer Emanual (D-Prince George's), during the budget hearing.

"However, with a gun to my head . . ."

"I should have such a to my head sometime," replied Emanuel.