The Obama administration has vetoed one of the biggest coal projects in the US in a historic decision against the destructive practice of mountaintop removal mining.

The Environmental Protection Agency said it was revoking the permit granted to the Spruce Number One mine in West Virginia, which would have involved blasting the tops off mountains over more than 2,200 acres, because it would inflict "unacceptable" damage to surrounding valleys and streams.

The agency said it was the first time it had revoked a previously issued permit in 40 years, but it said the action was warranted because the environmental damage was truly unacceptable.

The decision was immediately criticised by West Virginia leaders and mining lobby, and sets the stage for a broader confrontation between the EPA and the empowered Republicans in Congress over the limits of government regulation.

In its decision, the EPA said the project would have dumped millions of tons of mining waste into healthy waterways, burying 6.6 miles of streams and completely killing off fish, salamanders and other wildlife that live in them.

Mining waste dumped in the rivers would also compromise water quality for locals, the EPA said.

"The proposed Spruce Number One mine would use destructive and unsustainable mining practices that jeopardise the health of Appalachian communities and clean water on which they depend," the agency's assistant administrator for water Peter Silva said in a statement. "We have a responsibility under the law to protect water quality and safeguard the people who rely on clean water."

West Virginia's newly elected Democratic senator, Joe Manchin, who ran a campaign showing him using EPA regulations as target practice, said the decision would have a "chilling" effect on the economy.

"Today's EPA decision is not just fundamentally wrong, it is an unprecedented act by the federal government that will cost our state and our nation even more jobs during the worst recession in this country's history," Manchin said in a statement.

The much-anticipated decision brings to a close nearly 13 years of struggle over the Spruce Number One mine. The US Army Corps of Engineers initially approved Arch Coal's project in 2007, but the mine start date was held up by environmental lawsuits. The EPA, which was then led by a George Bush appointee, did not object.

But under Obama the agency has been much more willing to intervene on projects. The agency said it spent a year negotiating with Arch Coal, which owns the mine, to try to find a compromise that would be less damaging to the environment.

The EPA was careful to note that its decision protects two streams, Pigeonroost Branch and Oldhouse Branch. But coal mining underway in other areas of the Spruce site is continuing.

Environmental organisations, which have been fighting since the 1990s to block the project, said they were relieved.

"In the face of the political and industrial forces pressuring EPA to ignore the damage this mine would cause, it took guts for the agency to follow the science and the law," said Jon Devine of the Natural Resources Defence Council.