The decision will guarantee the futures of more than 300 employees of what is Australia's oldest operating underground mine, leading to an expected $372 million in annual business turnover for the Illawarra.

But it has also angered environmentalists concerned about the impact a new longwall site would have on catchment areas which supply drinking water to Sydney and the Illawarra.

The process for expansion began in 2006 and yesterday's decision will allow Peabody Energy subsidiary Helensburgh Coal to continue mining until 2031 - 20 years beyond the expiration of the present lease in 2011.

It is the first mining project determined following the Southern Coalfield Inquiry, whose report last year recommended a greater level of caution for mining approvals and put a greater onus on mining companies to demonstrate they would not cause unacceptable environmental damage.

NSW Planning Minister Kristina Keneally said the approval was an example of a "transparent, efficient" planning system and would sustain 700 direct and indirect Illawarra jobs.

Ms Keneally said subsidence impacts on the Woronora Reservoir would be "low and manageable" and upland swamps, cliffs and Aboriginal heritage features would be protected.

"The result is a determination that protects our drinking water supply and the environment," she said.

Peabody had sought to extract 3.2 million tonnes of coal a year from a single area, but the approval cuts the area in two and does not allow mining of some 8.6 million tonnes of coal in order to provide a "barrier" to the Waratah Rivulet and lower stretch of the Eastern Tributary.

This will reduce the mine's potential life by three years from what was initially sought.

While Peabody accepted that outcome yesterday, its representative told a hearing in March that this could make the mine unviable.

"The Metropolitan Coal approved mine plan is recognised as being conservative in relation to mining below and about stored waters, substantiating scientific evidence that mining activities are being managed to protect environmental resources," Peabody general manager external affairs Jennifer Morgans said yesterday.

"While there was robust discussion around the comparative social cost ... of the environmental pillar versus the environmental benefits, Peabody accepts the outcomes of the new planning process, recognising that the Planning Assessment Commission must balance the views of all stakeholders."