The State Government announced on Friday the Eastern Water Recyling Proposal which would pipe recycled water from the Eastern Treatment Plant in Melbourne to the Latrobe Valley would cost about $3.8 billion.

Water Minister Tim Holding said the project was too expensive and would impact too heavily on Melbourne household's water bills.

Under the plan recycled water would have been piped to the Latrobe Valley to be used in power station's cooling towers.

In return, potable drinking water would have been piped to Melbourne homes.

``The Brumby Government will focus on localised, cost effective recycled water projects after a business case found these large projects would have cost up to $3.8 billion adding substantially to Melbourne household's water bills,'' Mr Holding said.

The decision was welcomed by the Gippsland Resource Group who had campaigned heavily against the proposal.

Group president Merv Geddes said the group's biggest concern had been around clean drinking water being taken for Melbourne households.

``There was also no guarantee the A class (recycled) water would be used by the power stations,'' Mr Geddes said.

``Our group was concerned right from the start.

``We think if they're going to treat water, instead of tipping it out at Gunnamatta it should go to Melbourne to be used, not piping it all the way down here.''

Nationals MLA for Morwell Russell Northe said the announcement was ``a great win for the region''.

``Victoria's water rates are skyrocketing, particularly in Gippsland, as consumers pick up the tab for projects such as the Gippsland Water Factory while the Brumby Government rakes in billions of dollars in water dividends,'' Mr Northe said.

``It was simply inconceivable that they rise again in order to send Melbourne's muck to the Valley at a cost of $3.8 billion.

``I welcome news Gippsland's water is to remain in Gippsland to meet our urban, industrial and environmental needs and renew calls for the government to walk away from the similarly flawed North South pipeline.''