The proposed new Dungowan Dam and pipeline in northwestern NSW won't go ahead after funding was withdrawn in the federal budget.

NSW Premier Chris Minns said on Wednesday the cost had blown out from $480 million to more than $1.3 billion.

The dam was designed to boost water security in the Tamworth and Peel regions, but the benefit to cost ratio for the project had fallen below the NSW standard of one to one and was recently assessed as one to 0.09, the premier said.

The Albanese government withdrew $899.5m over four years on several pieces of NSW water infrastructure in the budget on Tuesday, including for the Dungowan Dam and the Wyangala Dam wall raising in the central west.

Water Minister Rose Jackson said the Dungowan Dam presented no cost benefits to the people of NSW, despite the area having major water security issues.

"I have always had serious concerns about the viability of the project because it would take 10 years to build and fill the new dam, putting the region's shorter term water security at serious risk," she said.

The proposed dam was criticised by Infrastructure NSW and Infrastructure Australia and a 2021 Productivity Commission report urged the government to scrap the project, saying buying water would be cheaper.

Dumping the project would save NSW taxpayers $632m and allow the government to look into more effective water security options for the Tamworth area, the government said.

Some of those options will be outlined in the government's forthcoming Namoi Regional Water Strategy, which will include options to boost the area's water resilience.

This includes advances in water treatment plants, water recycling facilities and water demand management options which extend the life of the area's water supply.

"I want to be clear that any projects we support must be affordable and effective and do not increase the divide between agriculture and the environment," Ms Jackson said.

The decision was hailed as a win by Greens MP Cate Faehrmann, who accused the National Party of being obsessed with dams.

"This is a huge win for the community, science and common sense," Ms Faehrmann said.

"This project never stacked up and it's a relief to see it finally placed on the scrap heap.

"It's shameful that the National Party's obsession with dams has seen millions of dollars and precious time wasted on pursuing this white elephant project that never had a hope in hell of being built."

The government's announcement came at a critical time because many regional communities were still recovering from devastating flooding and droughts, Opposition water spokeswoman Steph Cooke said.

"The community of Tamworth in the last drought was very, very badly affected. They all but ran out of water.

"How many droughts and floods do we have to go through in NSW for state and federal Labor to take critical water infrastructure projects seriously?"