THE NSW government has caved in to community and political pressure over coal seam gas, announcing a ban on all activity within two kilometres of residential areas and industry clusters, such as horse breeders and wine producers, across the state.

It has also announced that the Chief Scientist and Engineer, Mary O'Kane, will review all coal seam gas activity in NSW, including the effect on water catchments, and report on any risks by July.

No-go zones ... Barry O'Farrell. Credit:Lee Besford

The decision, endorsed by cabinet on Monday night, follows a surge in community anger that forced the energy company AGL to suspend plans to drill for coal seam gas beneath thousands of homes in south-western Sydney.

It comes just a fortnight after the federal Environment Minister, Tony Burke, set up coal seam gas as an election issue by attacking the state government's approval regime and threatening to use federal powers to intervene before the September 14 poll.