Lake Macquarie residents have launched a campaign in a bid to save a small cemetery in Teralba before it is covered in topsoil and turned into a reserve.

Newcastle Lord mayor Jeff McCloy's company, the McCloy Group, is building a 413-lot subdivision on land at Teralba.

Resident Margaret Berghofer says the Old Teralba Cemetery is in the middle of the planned housing estate and more than a thousand people have signed a petition hoping to save it from becoming a reserve.

She says her research shows the first burial was in 1880.

"They are going to lay over the headstones, cover with dirt and make it a reserve," she said.

"It will no longer be a cemetery.

"As far as we can see council has had numerous heritage reports done on the cemetery.

"All of those reports have been ignored and now they're going to lay over the stones and bury them."

Ms Berghofer says she believes the most recent burial was in the 1970s.

She says she is horrified that council has allowed the move.

"Who is going to know who is up there?

"There are 241 burials up there and only seven headstones now survive because of the neglect.

"I'd like them (council) to restore it to cemetery status and have the headstones restored and replaced, and made a proper place for people to go and remember that their family is there."

In a statement, Lake Macquarie Council says its heritage officer undertook an assessment of the cemetery and decided the site should be preserved in the form of a photographic and written archive.

The development application allowing the changes was approved by council in 2005.