The Victorian government has rejected a proposal by Deputy Prime Minister Barnaby Joyce that would see the federal government open up protected forests for logging, to save the Gippsland-based Heyfield timber mill.
Mr Joyce had also suggested the endangered status of the Leadbeater's possum, which is currently listed as critically endangered and is native to the logging-affected area, could be reviewed to save the mill.
The mill, slated for closure in September 2018, is owned by Australian Sustainable Hardwoods. It employs 250 people in the area, with downstream jobs estimated at up to 7000.
The Nationals leader said the future of the mill - the largest in Australia - and the livelihoods of staff and the wider Victorian forest industry, deserved greater consideration by the Victorian government.
"I don't mind possums... but I like people having a job more," Mr Joyce said. "The possum's not so much endangered as the timber worker is."
He wrote to Victorian Premier Daniel Andrews on Sunday offering to release protected forests in the state's central highlands, and seeking Environment Minister Josh Frydenberg's intervention to review the endangered status of the Leadbeater's possum.
On Monday, Victorian Environment Minister Lily D'Ambrosio accused Mr Joyce of being "reckless", and raised questions about the timing of the move, with an ongoing review into the possum's critically endangered status expected within weeks.
"VicForests, who manage our timber resources in Victoria, have made it absolutely clear. Offering timber volumes beyond that which they have said is available right now is reckless and would lead to job losses," she said.
The Leadbeater's possum is Victoria's state emblem.
Just two years ago, then-environment minister Greg Hunt listed the possum as critically-endangered, saying it would now receive the highest possible protection under national environmental laws.
"The challenges facing this iconic species are significant," Mr Hunt said at the time.
"It has undergone very severe population declines in recent decades with numbers having decreased by more than 80 per cent since the mid 1980s. That is why we will be working closely with the Victorian Government to find a solution which will help save the possum for future generations."
Mr Joyce said large amounts of recent evidence raised questions about the need for endangered species protection.
About 21,000 people are directly employed in Victoria's timber industry.
The company says it requires 130,000 cubic metres of sawlogs each year to stay in business, but was offered just 200,000 over three years along with a $4.7 million operational subsidy.
Government-owned VicForests, which harvests the timber for Australian Sustainable Hardwoods, says the supply offer was "at a level we believe can be sustainably produced", while also considering existing contracts with other customers.
Mr Andrews has previously said the government would buy the mill if a sale to a commercial operator does not proceed.
A spokesman for Environment Minister Josh Frydenberg said the federal government couldn't make unilateral changes, and the minister was prepared to ask his expert advisory committee to assess the conservation status of species when new information becomes available.
Powerful Victorian CFMEU boss John Setka this month said the mill's uncertain future was "fixable quite easily". He called on the state government to free up some more forest for harvesting.
Australian Forest Products Association chief executive Ross Hampton said industry had helped restore possum habitat after recent bushfires, with 445 new possum colonies found since 2009.
"At this rate, unless there is an immediate revision of this exclusion zone policy, and a comprehensive population study done to inform a revised conservation plan for the Leadbeater's possum, then the crisis facing Australian Sustainable Hardwoods and its 250 employees - as well as the thousands of flow-on jobs the mill supports - could be repeated across the Victorian forestry industry," he said.
Wilderness Society national forest campaigner Warrick Jordan said workers had been misled about the mill's long term viability.
"Barnaby's plan to open protected forests to logging will prevent 760 new, full-time regional jobs being developed in the Great Forest National Park's sustainable tourism plan," he said.
"Rather than offering false hope, governments must provide support to workers facing employment change, and invest in sustainable jobs for the long-term."