The Office of Natural Resources and Environmental Policy Planning (Onep) says it has advised the Department of Royal Irrigation to study alternatives before making a decision on building the Mae Wong dam in Nakhon Sawan's Lat Yao district.
The department should look at possibilities for water management in the Sakrae Krang river basin first, it said.
Onep was responding to anti-Mae Wong dam protesters led by Sasin Chalermlarp, chairman of the Seub Nakhasathien Foundation. Last Friday, protesters gathered at its office to object to its decision to examine the project's health and environment impact assessment (EHIA) study.
Mr Sasin submitted a letter to Onep against the study and also asking it to suspend any start on the Mae Wong dam's construction. He said he was informed by sources of Onep's intention to assess the study for the dam.
Atsadaporn Krapanond, Onep's deputy chief, said a group of experts appointed by Onep has decided the department should prioritise studying alternative choices for water management along the Sakrae Krang river basin.
"If that does not work, the department should proceed to the second step, looking at the possibility of reducing the dam size, before going to the final step of building it," she said.
"We see no need to rush to construct the dam as the health and environmental impact assessment is not ready yet."
She said the group rejected the project's EHIA study, submitted for a fourth time by the department, saying further amendments are still needed, including mitigation and impact assessment of sensitive ecological systems in the fertile forest zone.
The group's decision is in line with the Ministry of Agriculture and Cooperative's conclusion in May on the dam, coming up with three alternative choices.
They comprised constructing the dam, scaling down the dam, or finding alternative ways for water management.
Mr Sasin added he is not sure whether the department will withdraw the EHIA study, adding that the foundation is ready to fight to stop the project.
"It seems the project will go nowhere. We know the experts group will not approve the report for the time being, but we will not drop our guard. We will keep a close watch on the project as we don't know when it will end," he said.
The project stalled four years ago when Mr Sasin and other environmentalists staged a protest march in September 2013, that raised overwhelming public opposition to the dam. A special committee was set up to study the proposals further, but nothing has been decided.
The controversy came back in the spotlight when Mr Sasin posted on Facebook saying he might celebrate his foundation's anniversary last Friday at Onep as he had heard the project's EHIA was to be examined.