The embattled Lord Mayor of Newcastle, Jeff McCloy, has resigned in the wake of the Independent Commission Against Corruption (ICAC) inquiry into banned developer donations.

Mr McCloy, who is also a millionaire developer, refused calls for him to stand down for days, despite admitting he made banned donations to several Liberal candidates ahead of the 2011 New South Wales election, including to Newcastle's Tim Owen and Charlestown's Andrew Cornwell.

Both MPs have since resigned from politics.

Mr McCloy wrote to Newcastle City Council's general manager on Sunday and tendered his resignation, saying the controversy may affect the way council functions.

He also thanked the thousands of Novacastrians who supported change by electing him.

He said he believed he was leaving Newcastle in better shape financially and physically than when he started.

Premier Mike Baird said Mr McCloy's decision to resign was the only option.

"We've said it for the past few days, he should do the right thing and resign, and I'm pleased to see that's exactly what he's done," he said.

"These are extraordinary times, but I'm sure the council will come together, and often that's what you find," he said.

"When you're in a position when there is challenge, controversy often, what shines through is the strength of the community, and my strong belief is we will collectively get through this."

McCloy resignation sends Newcastle voters back to polls

Mr McCloy's resignation means Newcastle residents will be sent back to the polls to elect a new lord mayor, concurrently with two by-elections for the seats of Newcastle and Charlestown.

Mr Baird said yesterday the party had forfeited its right to represent the electorates but had not ruled out contesting the seats in the March 2015 state election.

"I am sorry for what we have seen play out," he said.

"I believe that we have let down the people of these electorates and indeed, as the (Liberal Party) state director (Tony Nutt) said, everyone across NSW.

"I'm confident that we can get our house back in order.

"Obviously we have a lot of work to do between now and then, regardless."

Mr Nutt issued an apology on behalf of the party over the weekend, saying the revelations "disgusted the honest, law-abiding parliamentarians, elected office bearers, members, donors and supporters of the Liberal Party".

"The people of New South Wales have every reason to be deeply disappointed and angry at those responsible," he added.

"As an act of atonement, the Liberal Party will not contest the Newcastle and Charlestown by-elections."