A controversial coal mine planned for the Southern Highlands has hit a major hurdle with the government finding groundwater effects "would be the most significant for any mining project that has ever been assessed in NSW".

The damning view of the proposed Hume Coal Project and its associated Berrima Rail Project is contained in the Department of Planning and Environment's assessment, released on Tuesday.

A long-running dispute over the proposed Hume Coal mine in the Southern Highlands has taken a new turn. Credit:Sylvia Liber

The report examined impacts of extracting as much as 3.5 million tonnes a year - split between coking and thermal coal - from an underground mine. It noted the project planned to use methods of extraction not previously used in Australia and also relied on storing "produced" mine water in its completed mine workings.

"[The] department does not consider that the economic benefits of the projects outweigh the likely adverse impacts on the environment and community," it said in a statement. "[The] projects are not in the public interest and should not be approved."