Mr Garrett said yesterday he had signed off on the $1.8 billion project, which would be subject to 14 conditions aimed at minimising the new town's effect on the environment.

They included that proponent Huntlee Holdings dedicated at least 5000 hectares of "offset lands" to the NSW Government in accordance with a deed of agreement.

That agreement is at the centre of a legal challenge mounted against NSW Planning Minister Kristina Keneally's approval of the Huntlee concept plan this year.

Other conditions include that Huntlee Holdings must contribute $100,000 to help the recovery of the endangered shrub Persoonia pauciflora and submit to the federal Environment Department a stormwater management plan to minimise potential effects on the Hunter Estuary Ramsar Wetland.

Huntlee project manager LWP Property welcomed Mr Garrett's approval yesterday and said it showed the State Government's assessment of the development was sound.

Huntlee was ranked last of 91 potential development sites in the Hunter by the NSW Planning Department.

Cessnock councillor James Ryan, a member of the Sweetwater Action Group that is behind the legal challenge, said Mr Garrett's approval was a "total failure" that went against the intent of Commonwealth environmental laws to promote ecologically sustainable development.

The development would destroy hundreds of hectares of the endangered shrub, which occurred only at Branxton, Cr Ryan said.

The project's future is still far from resolved with the challenge to its approval moving along slowly.

The Environmental Defenders Office, which is acting on behalf of the Sweetwater Action Group, said yesterday another directions hearing for the matter was expected to be held next Friday, when it hoped a hearing date would be set.

In a move similar to action taken by residents over the approval of developments at Catherine Hill Bay and Gwandalan, the Sweetwater group has alleged Ms Keneally's assessment was prejudiced because of the deed of agreement with the developer.

A court has reserved judgement on the Catherine Hill Bay case, though legal advisers to Ms Keneally have predicted she will lose the case.