The Environmental Protection Authority has recommended against a controversial coal mine being established near Margaret River in Western Australia's south west.


The EPA has rejected LD Operations' proposal for an underground coal mine, 15 kilometres from the tourist town, on the grounds of being environmentally unacceptable.


It received hundreds of complaints from locals arguing the mine would damage the environment and hurt the tourism industry.


One of the key factors in the decision was that the proposed mine would sit directly below a main water source.


"We are in a drying climate, water resources in that part of Western Australia are very important, this poses an additional, in our view, significant risk to the protection of those water resources," EPA chairman Dr Paul Vogel said.


"The environmental consequences of some low probability events may be so serious, widespread, or irreversible, that the proposal taken as a whole and on balance, presents unacceptable risks to environmental values."


The Premier Colin Barnett says the proposal is dead and the EPA has made the right decision.


"I had expressed as Premier that I thought that was a very doubtful prospect to have an underground coal mine in the prime wine growing area of Western Australia," he said.


"While this is a pro-development government, it is not development at any cost, and where projects are not acceptable, they will not be approved."


LDO's managing director Peter Ross says he is disappointed with the decision.


He says the company has not been given any reasons as to why the EPA declared the proposal environmentally unacceptable.


"Naturally we're disappointed, however we have to wait and find out what the reasons were for their decision and assess our options from there, we're still waiting for some information from the EPA," he said.