I am currently very interested in a home where my Realtor and the listing agent both happen to work for the same firm and in the same small office. I was going to put in an offer today but my agent informed me that it would be a waste of time as a higher offer was just rejected over the weekend. He also stated that the listing agent has been telling coworkers in the office that they are now interested in purchasing the property for themselves.
Naturally, I feel uneasy with the situation and was wondering if this creates a conflict of interest and how I should proceed?

Put in your offer. Your agent has the responsibility to you to present your offer. If the seller rejects it, have the seller write "rejected" on the contract and initial it. That way you know the offer was shown to the seller. Your agent is involving you in office politics when their only true responsbility is to you, their client.

If the situation makes you uneasy, go to the broker of the firm and relay your story. Good Luck!

If you have an interest in the property, Make the offer. You need to understand that price is but one of the three elements in an offer to purchase property. The other two are Terms and Conditions.

Even if your offer is lower, you may be able to make your Terms and Conditions more attractive than the "standard". Such as a faster closing, Pre Approval or Cash deal, limiting any contingencies. Often a seller will select a firm offer at a lower price than hope for a successful closing with a buyer who has yet to even qualify, or has an excessively long time to close, extensive list of contingencies or buyer required maintenance.

Key thing is to act now if your going to. If you delay, the property may go under contract and you will loose most if not all chance of acquiring it.

You actually have far more information about the sellers position than most buyers have access to. Use it to your benefit.