NSW National leader and Deputy Premier John Barilaro, who threatened to "blow up" the Berejiklian government over koala conservation planning laws six months ago, said the deal struck the right balance and would prevent farmers from being "strangled by red tape".
But the Greens say the regulatory changes "set koalas up for extinction" and say they are a victory for the logging industry.
The government on Monday announced rural NSW land zoned for farming or forestry - labelled "core rural zones" - won't be subject to the new Koala State Environmental Planning Policy (SEPP) 2021.
Nature Conservation Council Chief Executive Chris Gambian said excising farming and forestry zones from the koala SEPP was "a catastrophic setback for the species".
"These are where most of the koalas live and where most koala habitat destruction is happening right now," he said in a statement.
If you remove protections from these areas, you have basically given up on the species and signed its death warrant.
He said logging and land-clearing on forestry and agricultural land accounted for 90 per cent of all koala habitat destruction.
"Planning Minister Rob Stokes' policy of appeasement has given Nationals Leader John Barilaro everything he wanted," Mr Gambian said.
The government argued the new SEPP would enhance koala protection in areas such as Sydney, the Blue Mountains and the Central Coast, where more than 95 per cent of development takes place.
Mr Barilaro argued the solution would protect farmers and koalas.
Environment Minister Matt Kean said the new SEPP would facilitate the government's push to double the NSW koala population by 2050.
Labor labelled the policy "the chaotic koala capitulation", saying the Liberals had "buckled to the demands of John Barilaro".
"No wonder koalas are going extinct in NSW," Labor environment spokeswoman Kate Washington said on Tuesday.
"Large swathes of land across the state will be excluded from strengthened koala protections, while the government confusingly tries to juggle multiple koala SEPPs."
NSW Greens MP Cate Faehrmann said the policy favoured logging over koalas. She also criticised the government's plan to strip councils of their ability to rezone land used for primary production in an attempt to protect koalas.
"Two thirds of koalas live on private land yet this government has weakened land clearing laws so almost none of it is protected," Ms Faehrmann said.
The Koala SEPP 2020 came into effect a year ago and sought to simplify the process by which koala habitats are recognised and protected and extended the number of protected tree species from 10 to 65.
But the Nationals were concerned the policy would restrict land clearing, as more trees would be classed as koala habitat.
Operations ultimately reverted to the former SEPP.
A NSW parliamentary inquiry found in July that koalas would lose their habitat and become extinct in NSW before 2050 without urgent intervention.
The government in January committed to only 11 of the 42 recommendations made by the inquiry and supported 17 of the recommendations in principle.