Groups hoping to preserve the residential nature of their neighborhood in Rockville are unhappy with a proposal to allow a business in the city's 98-year-old Dawson Farmhouse.

Rockville officials became responsible for the farm in 1980 when a developer who owned the property built town houses on six of the farm's 12 acres and left the rest to the city. The City Council designated the property as park land but figured renovation of the 1884 farmhouse would be too costly for the city.

The council asked Peerless Rockville, the local preservation corporation, to find someone willing to buy the house and restore it. Peerless members said the best offer came from Philip Cantelon, who agreed to renovate the farmhouse but wanted to use its first floor for his businesses, the National Council on Public History and History Associates Inc.

At last week's City Council meeting, residents from the Hungerford-Stoneridge area around the farm said they didn't want a business in their neighborhood. Several said they opposed Cantelon's plan to build additional living quarters onto the farmhouse.

The citizens group asked the city to find someone to restore the farmhouse as a home, but council members said the city had been unable to find anyone who had both the money and the desire to do the job.

The city Planning Commission reported it has reservations about allowing business and home use of a residential property. "However, there appears to be no other workable zoning alternative available . . . to accomplish this very worthwhile preservation project," its report stated.

"Right now the farm has no use at all," said Larry Owens, the city's chief planner. "It's boarded up and fenced off. Since it's been vacant, it's been severely vandalized."

The council has not decided what conditions to put on any sale agreement, Owens said. Officials expect the council to take action on Cantelon's proposal in coming weeks.

In other developments, about a dozen residents attended the city's hearing on whether to create an advisory commission on education, City Clerk Helen M. Heneghan said. The residents commended the council for taking steps to make the Montgomery County school board more aware of Rockville's education issues.

The council hired Simpson Electric Co. of Annapolis for $26,329 to install a traffic light at Washington Street and Dawson Avenue. A $14,713 contract for maintaining the city's two-way radio system went to Teltronic Industrial Systems of Silver Spring.