The federal funding is subject to matched funding from the New South Wales government and from the mining industry, Climate Change and Water Minister Penny Wong said today.

The study will look into surface and groundwater resources in the Namoi region, including providing scientific information to “benefit community awareness, decision processes in all spheres of government and stakeholders in the agricultural and mining sectors”.

Water has become a contentious issue in the Gunnedah Basin after BHP Billiton started drilling at its $A2 billion Caroona project.

Environmental sensitivities in the Liverpool Ranges led to BHP ruling out extracting coal in the flood plains with longwall mining; however, the mining giant is still looking at the ridge country in the region to potentially house longwall mining.

The company has already launched a study of water systems beneath the leases and says it would not bring forward a mining proposal that would impact the aquifer or agriculture on the flood plain.

However, local farming groups have been calling for an independent study into groundwater in the area.

The Caroona area has an estimated 500 million tonnes of untapped coal resources. BHP holds a five-year exploration licence over the area.

BHP originally said the mine approvals process for Caroona would commence in 2010, with construction slated for 2012 and first coal expected in 2014.

Yesterday's funding announcement has been welcomed by locals.

“This is a significant breakthrough in an issue that's been going on for over a year now. This money will go towards a scientific study of the ground and surface water and how that will or could interrelate with the future impacts of mining," federal independent MP for New England Tony Windsor told ABC Radio.