The NSW government announced on Monday a ban on all coal seam gas activity within two kilometres of residential areas and industry clusters across the state.
The ban will apply to any coal seam gas proposal that has yet to be approved under the Environment Protection and Assessment Act or the Petroleum (Onshore) Act.
Premier Barry O'Farrell said suburbs, country towns and other urban areas would become "no-go zones for CSG activities".
"This is good news – and a welcome announcement – but it does not protect the land and water of NSW communities, said Stop CSG Illawarra spokeswoman Jess Moore.
“The Premier has failed to rule-out CSG in drinking water catchment areas. These take up less than 2% of land in NSW, yet provide drinking water for 60% of people in the state," she added.
"These are areas so protected that I can be fined up to $44,000 for walking there.
"The people of NSW need more than another Government investigation. We need a freeze on the industry for a Royal Commission; one that looks into the relationship between industry and Government, and operates transparently," she added.
Ms Moore says under the new rules, existing approvals will go ahead.
"This announcement acknowledges the risks posed by CSG, then states that existing approvals will go ahead; a contradictory position.
"The Apex Energy project – in and around the Woronora and Upper Nepean drinking water catchments – can still be approved, putting at risk the drinking water of two-thirds of people in NSW.
As part of the measures, the government announced that chief scientist and engineer Mary O'Kane would review all CSG activity in NSW, including the effect on water catchments.
Energy companies say gas bills will rise and billions of dollars of investment could be driven out of NSW because of the new regulations.
AGL Energy CEO Michael Fraser says the new regulations are "disastrous".
"If I look at investments that have been made and the potential future investments that have been potentially taken off the table then you could be talking a couple of billion dollars worth of investment," Mr Fraser told reporters in Sydney on Tuesday.
It's believed the expansion of AGL's Camden gas project in southwestern Sydney - suspended because of community anger - can't proceed under the changes.