I am not a native speaker, but you engage conversation with someone. The first one sounds definitely more natural than the second one to me.
Saying that you are "not engaged" sounds strange, because the quo-speaker already knows that you aren't and it does not really express your intention of not get engaged in it.
You could simply say : I don't feel like engaging in this conversation.
I don't want to engage in conversation.
It's just a statement telling people that you are not engaged in this conversation. Maybe you are not listening to what other people are saying or you simply are not participating in the conversation. However, it does not say whether you want or don't want to engage.