A US$1.3B proposal to flood the canyon, one of two in the Cleveland National Forest, creating a reservoir and building a facility to power 350,000 homes, had been made by Nevada Hydro.
The EPA says that the canyon plays host to a network of springs that make up a rare sloping wetland, and interfering with it would be detrimental to the nation's waters.
Officials from Nevada Hydro, along with partners in the scheme Elsinore Valley Municipal Water District, will look to appease the EPA's concerns in their final project report. One possibility is to use a different canyon for the project instead.
The plan has been long opposed by environmental activists.
