Key among the worries is the diversion of fresh water from agriculture and the possible pollution of aquifers, including the Great Artesian Basin, the world's largest underground aquifer.
The growing confrontation over coal seam gas is the latest in an escalating dilemma over complex rival demands for water on the world's driest inhabited continent.
Vast supplies have already been lost to salination and pollution, especially throughout the Murray Darling Basin, the future of which still hangs in the balance as competing political, social and industrial pressures hinder the development of a management system crossing the borders of the eastern states.
The basin includes Australia's three largest rivers, the Murray, Darling and Murrumbidgee, which account for 85 per cent of all irrigated farm production, and contributes A$9 billion ($11 billion) a year to the national economy.
The system also provides water for 3 million people and dozens of towns and cities, but the usage has dramatically reduced its flow, worsened by salination and pollution.
After decades of political wrangling and failed attempts to devise a national approach, a draft management plan is due to be released next month.
Once regarded as a nuisance by-product, the methane-rich coal seam gas is now seen as both a boon to clean energy - producing 50 to 70 per cent fewer greenhouse emissions than many coal-fired generators - and as a huge new source of wealth. Over the past decade demand has soared, especially from China, with the development of technology.
Production is based on thousands of wellheads, mainly in southern Queensland and northern NSW. But while the industry argues that production is highly regulated, opponents say the claims of long-term safety have not been proven.
Concerns have grown, especially about the hydraulic fracturing of coal seams to allow access to gas reserves. Known as "fracking", the process involves pumping a mixture of water, sand and chemicals under pressure to break surrounding rock and force gas out.
Opponents claim tests have shown the process releases toxins that could severely pollute underground water supplies, and that in some areas of Queensland the levels of aquifers have dropped dramatically, leaving only water heavily contaminated by salt.
Pending the outcome of an inquiry due to report next month, the NSW Government agreed to a six-month moratorium on fracking in the Hunter Valley north of Sydney, a tourism region also important for coal, electricity generation and sensitive rural industries including wine.
But farmers and Greens want far tougher controls. The NSW Farmers Association said in its submission to the state inquiry that the cumulative impact of coal seam production would divert a "significant portion" of fresh water to industry, and argued for landholders to be given the power to stop miners entering their properties.
Farmers and Greens also say that not enough is known about the long-term effects on water supplies and food security, a view echoed in expert submissions to the inquiry.
The National Water Commission said that coal seam gas production risked "significant and adverse" effects on surrounding water systems, and that the industry's annual projected 300-gigalitre demand for water from the Great Artesian Basin compared with existing total extraction of 540 gigalitres.
Sydney University's Hydrology Research Laboratory said: "Due to the nature of groundwater there are major issues with uncertainty related to the short- and long-term effects of coal seam gas extraction."
