Welders have been slicing up wrecked British and Dutch warships from the landmark 1942 battle for several years, it is claimed.
They include the wrecks of HMS Exeter and HMS Encounter which were sunk by Japanese sailors.
Locals say they have now been plundered for their brass, bronze and copper.
And they also contain a rare, radiation-free steel dating back before the first atomic bomb which is highly valuable for scientific and medical instruments.
The revelations have caused shockwaves among campaigners in the UK and the British Embassy is understood to have been taking a key interest.
Relatives of the men who died are calling for tougher punishments against the looters.
Indonesian officials are investigating the outrage and are currently excavating a cemetery in Brondong, East Java, to try and find the scattered remains.
Welders have claimed they regularly turned up bones as they used the wreckage to create the highly sought after steel.
The metal can be flogged for £10.50 per tonne, allowing them to amass a small fortune, with the bones being handed to their bosses for disposal.
After that they are thrown in mass graves at sites like Brodong.
One told the Guardian: “We often found bones.
“We worked here all the time, so we didn’t pay attention to the, whether there was ones or no bones, it made no difference to us.”
Governments in south-east Asia have come under pressure to stop maritime war graves being plundered.
And the Commonwealth War Graves Commission today said the sites should be left untouched.
A spokesman said: “Any vessel like that, any craft, should be left alone and respected.
“Dignity should be afforded to all the remains that lie therein.”
The claims come the day after the 76th anniversary of the Battle of the Java Sea which saw the allies clash with Japanese forces.
Over 1,000 British and Dutch sailors were lost in the carnage.