A NSW Government plan to revitalise an inner-Sydney suburb has sparked fears it will tear apart the close-knit community and generate a "class war" in the area.

Under the plan, towers that are home to about 4,000 tenants would be knocked down, and a station built on a new Metro train line.

Six public housing towers and hundreds of homes at Waterloo are set to be refurbished to provide better accommodation for social tenants and open up the area to private investment.

"What has been proved already is that if you can have an appropriate mix of private and social or public housing, you get far better outcomes for young people," the Social Housing Minister Brad Hazzard said.

The redevelopment will be staggered during the next 20 years, and residents will be relocated and given the opportunity to return.

But many say they have not been consulted, and believe the Government will demolish the towers instead of refurbishing them.

"Our fight in this area is to protect the homes of the vulnerable elderly around here," said Richard Weeks, from the Waterloo Public Action Group.

They have erected the tent embassy which used to stand at nearby Redfern, during that community's protest against the plans to regenerate the area and to secure housing for Aboriginal residents.

An artist's impression of what the area around the new station will look like. ( Supplied: UrbanGrowth NSW )

One of the organisers, Jenny Munro, said the Government's plan for public and private housing to be built alongside each other at Waterloo would not work.

"What they're setting up this community for is a class war after the construction period," Ms Munro said.

"The government (is) deliberately making the people that come from here and have lived for generations here, the minority in this new mix."

Mr Hazzard told the ABC that he was confident the changes would work.

In May, the City of Sydney Council expressed concern that density in the area would be too great, but the Premier dismissed concerns, comparing density levels to nearby Green Square.

"Some of the community are really looking forward to it, others are fearful of change, which we understand," he said.

Embassy members have vowed to remain until the Government agrees to more consultation.

"It's just being forced upon us, there's no real consultation," Ms Munro said.