Environment Minister Greg Hunt said he approved the project with "18 of the strictest conditions in Australian history which fully incorporate all advice" from an independent scientific committee.

The mine, owned by China's state-controlled Shenhua company, is expected to produce as much as 268 million tonnes of coal  during its 30-year life.

"There will be no impact on the availability of water for agriculture," Mr Hunt said in a statement. "The conditions I have imposed limit water use to less than 0.09 per cent of available groundwater – that's less than 1/1000th of the resource and less than the amount of water from one agricultural bore."

The minister also said the mine would be restricted to the ridge country around Mount Watermark rather than the black-soil plains. Shenhua would have to stop work if any agricultural water supplies were affected and make good on any losses, he said.

However, Tim Duddy, a farmer whose land lies partly on the proposed site, said Mr Hunt failed to understand the difference between so-called consumptive water extracted by farmers and the potential for intercepting and disrupting groundwater supplies in the region.

"It's not the water that they're taking that's the problem," Mr Duddy said. "It's the water that they're harming."

The proposed mine, located about three kilometres west of the town of Breeza, is expected to destroy 789 hectares of an endangered ecological community, much of it box-gum woodland, and 148 hectares of other woods.

'Blowing up'

Shenhua welcomed the federal approval after "more than five years of unprecedented scientific scrutiny".

"Today's decision to approve the Watermark Project is the final, irrefutable confirmation there will be no adverse impacts on the region's groundwater and impacts on sensitive ecological areas have been appropriately managed and offset," Paul Jackson, the company's project manager, said.

The company said it will now develop operating and management plans to be ready for assessment by the December quarter of this year.

However Fiona Simson, president of NSW Farmers, said farmers would not drop their opposition to the mine.

"It's literally blowing up a 35-square-kilometre hole in the heart of Australian agriculture," Ms Simson said.

Ms Simson said the approval process had been flawed including the decision by former NSW energy minister Chris Hartcher to exclude Shenhua and BHP Billiton - which is planning a separate coal mine in the region - from standard flood-plain provisions limiting construction and other activities.

Shenhua and BHP are the only two groups "operating on the flood plains of all of NSW that don't have to comply to the flood-plain definition", she said.

Stephen Galilee, chief executive of the NSW Minerals Council, said the project had been "rigorously and extensively assessed over many years" and should now be permitted to proceed.

"There will always be some for which no amount of assessment will ever be enough until the answer is 'no'," Mr Galilee said. "It will have a small impact on land and water, while making a big economic contribution to the region, including much needed regional jobs."

'Insane' move

The approval pits the government against influential radio host Alan Jones, who has previously raised strong objections to the mine, saying it would be built on "soil that you could eat" and farmers were "defenceless".

Mr Jones is presently overseas and unavailable for comment.

Mr Hunt's decision also puts him at odds with federal Agriculture Minister Barnaby Joyce who has described the proposal, which falls in his electorate of New England, as an "absurdity".

Ms Simson also noted that the environment minister had signed the approval for the mine on Saturday, July 4, the same day Mr Joyce was busy releasing the federal government'sAgricultural Competitiveness white paper.

"The threat to agriculture and water resources of this region posed by mining is too great and it shouldn't be approved," Ms Simson said.

The Greens echoed the concerns.

"The community will be appalled at their local member and Minister for Agriculture, Barnaby Joyce, who has grossly failed to protect the Liverpool Plains," Larissa Waters, deputy leader of the federal Greens, said.

"With the coal price in structural decline, it's economically insane to be sacrificing valuable farming land for the dying coal industry, especially when we have viable renewable energy alternatives," Senator Waters said.

Jeremy Buckingham, NSW Greens MP and mining spokesman, was less diplomatic on social media site,Twitter:

Legal challenge

Mr Hunt said the approval was made as the 15th of a 17-stage process, and that safeguards were in place to ensure the mine does not have a bigger impact than predicted.

Other hurdles, though, include a challenge in the Land and Environment Court of NSW by the Upper Mooki Landcare Group, which claims that the NSW Planning Assessment Commission had failed to assess the mine's impact on several hundred koalas in the region.

"Shenhua needs both state and commonwealth approvals to lawfully mine and work on the site," said Sue Higginson, principal solicitor with Environmental Defenders Office NSW, which is acting for the landcare group.

"The state approval is currently under challenge in the court by our client," she said. "In these circumstances the usual practice is not to commence any ground works until the outcome of the proceedings/case is known."

Mr Duddy, who runs cattle and grows crops on land straddling both the Shenhua and BHP proposed mine sites, said his local association - the Caroona Coal Action Group - was also exploring legal options to prevent the project proceeding.

These would include targeting the impact on water in the area. "This is the most significant groundwater source in the Murray-Darling Basin," he said.

With Nicole Hasham