A strike by 14,000 iron ore workers headed into its second day despite steel company threats to sue the United Steelworkers for millions of dollars a day in damages for breach of the union's no-strike agreement.

The walkout, centered in the iron ore range of northern Minnesota and Michigan's Upper Peninsula, was the first major strike to hit the steel industry in 18 years.

It shut down two-thirds of the nation's iron ore production, but there was no immediate indication of an interruption in production of steel, which depends heavily on ore mined at the struck plants. Some companies reported inventories sufficient to keep their mills in business for the immediate future but warned of "devastating" effects on domestic steel production if the strike is prolonged.

A total of 15 plants in five states were struck starting at 12:01 a.m. yesterday after negotiations deadlocked over worker's demands for an incentive pay plan under which employees are rewarded for increased production. Steel production workers currently receive incentive pay under their national contract.

Industry bargainers contend that incentive pay is a "national" issue covered by the nationwide steel agreement negotiated last April, which bans strikes over so-called national issues buy permits strikes over local grievances. USW bargainers say the issue is a local one not subject to the no-strike clause.

The companies filed suit last week seeking to block walkouts on grounds that they are forbidden under the no-strike clause. U.S. District Court Judge Daniel J. Snyder Jr. ruled that he lacked jurisdiction to issue an injunction but said he believed the incentive pay question was not a local issue and said a strike would violate the no-strike provisions.

Industry spokesmen have said damages will be sought, adding that they could amount to "several millions of dollar a day."

According to both sides in the dispute, there were no major negotiations yesterday and none is scheduled for today, although a resumption of talks is possible at any time.

The three-year-steel contract negotiated last spring gave workers an 80-cent-an hour increase over three years, plus fringe benefits. Wages now average more than $8 an hour. Iron ore workers contend that incentive pay would give them an additional 65 to 80 cents an hour, depending on production.

Picket lines were reportedly peaceful as Minnesota's Mesabi iron range, source of two-thirds of the nation's ore, virtually shut down yesterday - along with ore facilities in at least four other states. Some workers told the Associated Press they were showing their opposition to the no-strike agreement, which was an issue in the union's elections earlier this year.

Both industry and union officials said earlier that a strike could jeopardize the future of the agreement, which lasts until the current contract expires in 1980.