Chancellor Helmut Schmidt told West Germans today that the political terrorism plaguing the country could be overcome, but he warned against being "carried away into law-and-order hysteria" that could erode civil and constitutional liberties.

The challenge confronting federal and state authorities and all political parties, he said, is "not to allow themselves to be provoked into false alternatives" for a democracy seeking the proper course to deal with terrorists.

The chancellor spoke here before about 400 of his fellow Social Democrats, delegates to the ruling party's annual political convention.

Although questions about lingering unemployment, a stalled nuclear power program, and the neutron bomb fill the agenda of the four-day meeting, the recent wave of terrorist killings in West Germany has provided the dominant theme here.

"Thirty years after being established for a second time," the chancellor said, "German democracy is going through another testing period."

Despite the success last month of a daring commando raid to free hijacked Lufthansa airliner hostages and one recent success in the massive manhunt for the hard-core Red Army Faction extremists, the threat of further attacks still hangs over West Germany's airlines, its businesses and its political and economic leaders.

In sharp and somewhat depressing contrast to the relaxed atmosphere of previous party congresses, this week's four-day meeting finds hundreds of uniformed and plainclothes police guarding the big concrete and glass congress center.

The terrorist dilemma was first raised during an opening-day speech yesterday by former Chancellor Willy Brandt.

"The democratic quality of our society can stand comparisons with any of our neighbors." Brandt said.

He added, however, that "We cannot act as if we were free from the burden of the past. History cannot be shaken-off. The only chance of overcoming the burden of past history is to write better contemporary history."

Today, Schmidt defended leftist intellectuals, such as Nobel-prize winning author Heinrich Boell, who have been ridiculed by some opposition conservative politicians and newspapers as being dangerously naive about the roots of terrorism.

Schmidt warned that the imprecise and indiscriminate labeling of honored citizens as "sympathizers or intellectual pathfinders" for extremists is a way to bring on a German brand of McCarthyism.

The conservative opposition is pressing for several controversial new laws while Schmidt's left-center coalition is pledged to waging the battle by constitutional means, it alreay has supported one controversial law that isolates jailed terrorists from their lawyers for emergency periods. The government considered this necessary to deal with radical layers alleged to be in conspiracy with their clients.

A small group of left-wing Social Democrats opposed the law and could have upset Schmidt's tiny majority in Parliament if the conservatives had not joined the government in the vote.

In their speeches here, both Schmidt and Brandt warned critics on their left wing to get into line. If they do not, they could cause trouble for a Social Democratic Party that holds onto power only through its coalition with the smaller Free Democrats.

Schmidt is the key to the Social Democrats' fate and the chancellor's personal prestige and popularity has been greatly bolstered by last month's successful commando raid in Somalia, the handling of negotiations with the kidnapers of industralist Hanns-Martin Schleyer and his general refusal to be blackmailed by the extremists.

While Schmidt's new popularity has put him in a more powerful position to deal with his party's left, they do not see the mission of the Social Democratic Party as exclusively directed at the re-election of Helmut Schmidt.