The construction of the largest dam in southern India has been thrown into doubt by the environment ministry.
It says that the government of Andhra Pradesh state has not yet met the conditions to receive environmental clearance for the $2bn Polavaram dam.
The enormous reservoir the dam will create will flood hundreds of villages, making about 200,000 people homeless.
Environment Minister Jairam Ramesh said the dam would not be allowed to go ahead until local views had been heard.
This is the latest major infrastructure project to be challenged by India's increasingly assertive environment ministry, the BBC's Mark Dummett in Delhi says.
Only last month a committee advised that the country's single largest foreign investment, a $12bn dollar steel plant in Orissa state should not go ahead.
Economists say such projects are vital for India's development.
The dam in Andhra Pradesh has been planned for decades and is already being built.
It will not only generate much needed electricity, but will also provide irrigation and drinking water for hundreds of thousands of people.