An additional 450 billion litres of water for the Murray Darling Basin system will be recovered in a bid to appease South Australia's concerns over a lack of environmental water.
Prime Minister Julia Gillard, Environment Minister Tony Burke and Premier Jay Weatherill made the the announcement in Goolwa on Friday.
"The Gillard Government has today resolved to provide $1.77 billion over ten years from 2014 to relax key operating constraints and allow an additional 450 [billion litres] of environmental water to be obtained through projects to ensure there is no social and economic downside for communities," said Ms Gillard.
The federal government will forge ahead with the Murray Darling Basin Authority's plan to return 2750 billion litres of water to the environment, sourced predominantly from irrigators.
However, from 2019, the additional 450 billion litres per year will be sourced from on-farm improvements - effectively returning 3200 billion litres back to the system.
In a statement, Mr Weatherill has claimed the decision as 'a win'.
“We have won funding for river communities so they won’t bear any more burden But the fight isn’t over by a long way," it read.
Opposition to decision is expected to come predominantly from New South Wales and Victoria which have large irrigation communities.
A statement released by the Griffith Business Chamber labelled the decision 'destructive'.
"Gillard & Burke have now truly crossed the line on whether they can be trusted to protect hundreds of Basin communities like Griffith, Leeton & Coleambally," read the statement, attributed to president Paul Pierotti.
"Our NSW Minister Katrina Hodgekinson & Vic Minister Peter Walsh must now take a stand to stop this destructive & thoughtless process."
The Victorian government has also voiced its opposition to the plan.
Ms Gillard said $200 million of the $1.7 billion in funding would be used to remove constraints like low-lying bridges and undersized dam outlets which currently limit both the volume of water that can flow through river systems and its environmental use.