Radical new rules for assessing large mining projects in NSW risk serious damage to Sydney's drinking water supply, the government agency set up to protect water quality has warned.

The Sydney Catchment Authority says the city's drinking water catchments, spanning 16,000 square kilometres, should be exempt from the changes proposed by the O'Farrell government. It also called for a ban on longwall mining near major lakes and reservoirs.

The government's proposal would increase the odds that mining projects are approved by making their economic benefit the "principal consideration" of the assessment process.

But the authority has warned the changes were concerning and could lead to "increased risks" to the Sydney catchment, which supplies water to 4.5 million households and other users. It may also damage water supply infrastructure including dams and pipes, cause loss of water from storages and degrade water quality, it said.