THE State Government has approved another massive coalmine expansion south of Sydney, on condition the mining giant BHP Billiton leaves buffer zones around rivers that feed the city's water supply.

The environmental assessment of a new section of the Dendrobium mine noted that longwall coal extraction would be likely to crack the earth and drain swamps in the catchment area but decided that the level of damage was acceptable.

"On balance, the department believes that the modification's economic benefits sufficiently outweigh its environmental costs and that it is therefore in the public interest," the assessment report from the Department of Planning said.

The Government accepted a plan from the BHP subsidiary Illawarra Coal that offered to leave some rivers untouched, and added a buffer zone under the Sandy Creek waterfall, which the department describes as a "very significant natural feature".

It withheld approval on other sections of the Dendrobium expansion, pending further studies into the impact of subsidence - in which the surface and bedrock cracks open when large amounts of coal are removed underground.

The new conditions proposed by the Government also require that water flowing into major dams at Lake Cordeaux and Lake Avon not be affected by surface damage caused by the mine and that "any water quality impacts are offset by compensatory measures to be developed in consultation with the Sydney Catchment Authority".

The mine would still be a threat to upland swamps, said Ann Young, a geoscientist who has studied swamp ecology in the area.

"There are a significant number of swamps in the area that will be drained when the bedrock is cracked," Dr Young said.

"It's not as simple as saying the water will emerge unchanged downstream because the swamps act as a filter whereas the water that leaks out of fractured bedrock is polluted with iron oxides."

Other sections of the same mine had already led to cracking and draining of swamps, and the destruction of plant and animal life that depend on them, Dr Young said.

The Total Environment Centre said the mining approval contained some improvements over previous plans, but fell short of a good environmental outcome.

"This will still result in a serious amount of damage to the environment for short-term gain," said the centre's director, Jeff Angel.