Diatom-inferred changes in past water levels and the evolution of peatlands during the Holocene period are investigated in the Honghe National Natural Reserve (HNNR), which is located on the Sanjiang Plain of Northeast China. This investigation began with analyses of fossil diatoms and the corresponding water environments from the surface sediments of peatlands. The detrended correspondence analysis (DCA) and redundancy analysis (RDA) methods show that the water level is one of the major factors that drives the distribution of diatom assemblages in the peatlands of the HNNR. A diatom-based inference model is developed, and the Holocene water levels are reconstructed based on the inference model. Applied to a one-component weighted averaging partial least squares (WAPLS) model, the jackknife statistical test yields a relatively high correlation coefficient and a low root-mean-squared error of prediction (R²_jack = 0.220; RMSEP_jack = 0.2339) compared with a series of models. The peatland water level was relatively high from 6.5 to 2.8 ka (1 ka = 1000 cal yr BP), and species that prefer deep water, such as Aulacoseira crenulata (Ehrenberg) Krammer and Navicula cuspidata Kützing, were dominant at that time. The water level also increased markedly from 2.8 to 2.5 ka and subsequently declined from 2.5 ka to the present. A clear reciprocal shift is noted between an assemblage of deep-water species that includes A. crenulata and species that prefer sphagnum bogs, including Nitzschia perminuta (Grunow) Peragallo. This evidence suggests that the water level of the HNNR peatland became shallower, implying the presence of a paleolake in the early or middle Holocene that was followed by the development of the peatland, which is a result of paludification, up to the present time. These results strengthen the potential for paleo-reconstructions of the hydrology of the peatlands of Northeast China using multiple proxies.