The RMS mistakenly sent letters to dozens of Blackheath residents, warning them their homes may be compulsorily acquired for the highway duplication.
The revelation was made by Blackheath Highway Action Group (BAG) spokesman Michael Paag at a large public meeting in the town last Thursday night.
"Those letters were sent to you in error... It was a gross error, a mistake. It isn't right to treat our community with such disrespect."
Mr Paag said Alistair Lunn, the director, western region, for Transport for NSW, had admitted the mistake in a phone call to BAG.
All the residents would now be contacted to tell them the letters were not meant to be distributed, he said.
The leaflet said the homes were "in an area of interest within the corridor. Because we are in the early stages of the program, we are not acquiring property but we are investigating a strategic corridor area."
Residents who received the notices were extremely upset at the prospect of losing much-loved homes.
When Mr Paag told the meeting of the "stuff up", there were gasps of astonishment from the audience.
Later the mayor, Mark Greenhill, apologised to the residents, although neither he nor council had been involved.
"I apologise to you ... because there's no elected official from the government here to do so."
Transport for NSW apologised for causing concern, saying the flyer was meant to alert people that their houses fell within a strategic corridor and to encourage them to actively participate in co-designing the route
"It was not the intention of the flyer to suggest that their property was linked to a particular route, as no route has been determined," a spokeswoman said.
The plans look at four options for Blackheath: a wide bypass over Centennial Glen and Porters Pass, a narrow bypass along Station St beside the railway line, expanding the highway through the middle of town or a tunnel.
Mr Paag told the meeting the RMS was "trying to scare the pants off us with dumb options".
BAG would not support any of the options but would work with other groups to develop a "climate smart" plan, he said.
In Mt Victoria alone, Mr Paag said the project would cost $1 billion and involve two tunnels and four viaducts, one 80 metres high.
At Medlow Bath, the RMS has conceded the village cannot be bypassed. Instead, it wants to build a four-lane dual carriageway between the railway line and the front fence of the Hydro Majestic, leaving huge trucks roaring just metres from guests at the iconic hotel.
The trucks, including B-doubles up to 26 metres or more long, would then be dumped on to the existing highway at the Explorers Tree in Katoomba.
They would have to negotiate the multiple speed zones, villages, schools, side streets and driveways all the way down to the plains.
The plans promise to save 10 minutes on the trip from Lapstone to Lithgow.
Mr Paag also pointed out that in NSW, dangerous goods, like fuel, cannot be transported in a tunnel.
The mayor said there was no merit in any of the RMS's "cruddy options", which would not only destroy the Upper Mountains towns, but create havoc with monster vehicles travelling all the way down to Lapstone.
He called on the community to unite against the plans.
"We are better together... It's better that the government confronts 78,000 residents than eight or nine thousand."