When the government scrapped the Lake Illawarra Authority last year, it outlined plans to take control of 32 hectares of waterfront land at Warrawong, along King Street and Northcliffe Drive.

The prime development site, known as Kully Bay, was transferred in May and was the only land retained by the government.

A long list of other, more costly, former LIA lands was to be transferred to Wollongong City Council, even though councillors have said they will not accept these assets unless the government guarantees future lake funding.

The government's real estate arm, Government Property, has now confirmed to the Mercury that it is "in discussions" with the council about how to use the Kully Bay site.

Possible uses included "new residential development, a community centre, new commercial or retail sites, preserved wetlands and open space", a Government Property spokesman said.

It is not clear what form any of these developments may take, with the spokesman saying the government "would continue to consult with council and other stakeholders on how the land can be better used".

At Monday night's council meeting, a number of Wollongong councillors raised concerns about the plans and lambasted the government for using the possible sale of Kully Bay to add to its coffers while leaving the council to cope with the costs of maintaining Lake Illawarra.

"Kully Bay lands are going to be used for some kind of commercial development and not a brass razoo of that money is going to come anywhere near the council," Labor's Ann Martin said.

Lord Mayor Gordon Bradbery agreed, saying the council had been "dudded" and should have been able to use the valuable development land to help pay for the lake's ongoing maintenance.

"This should have been council land, and we should have been able to do what we wanted to do with it instead of having it appropriated by the state," he said.

"We've been cut out of an asset that we could have translated - even if we had sold it off - into money to offset the costs of maintaining the lake and its infrastructure."

Cr Martin said her constituents would be shocked by the plan to rezone dedicated tourism lands as a residential development.

"There's no way the government has the right to take over our planning controls, to up-zone land and to do something that's completely contrary to all our plans and build apartments or whatever," she said. "If they put houses there, you can bet your bottom dollar that it won't be houses that our community can afford. So that means we would not only have the same access to Kully Bay, it also means the whole demographics of that area would change.

"Warrawong and Berkeley are among Australia's most disadvantaged communities and they want to take public space away? It's an act of bastardry."

Liberal councillor Bede Crasnich said he was not against the development near the lake foreshore, but said it needed to complement the character of the surrounding area.

"If anyone thinks they are going to be putting sky-rises or any big complexes then I wouldn't be in favour of that at all, but light development, small dwellings or trying to use its tourism potential would have merit," he said.