Water shortages facing Australia's drought-hit prime agricultural area might be worse than expected, the government was told on Wednesday, as river towns braced for unprecedented restrictions on water use.

The head of an inquiry into relocating farming to Australia's tropical north, Bill Heffernan, told the Australian Financial Review that the amount of water flowing into the major Murray-Darling river system could be 40 percent less than thought.

However, Australia's Environment Minister Malcolm Turnbull said there was no reason to panic and Heffernan's concerns about over-counting surface and ground water had been accounted for.

"The problem is one we are aware of," Turnbull told Australian Broadcasting Corp. radio, adding there was no need for the government to increase a A$3 billion ($2.5 billion) 10-year plan to buy water back from drought-ravaged irrigators.

Prime Minister John Howard in April urged Australians to pray for rain and told farmers along the Murray-Darling they would receive no irrigation water without higher inflows into the rivers in the lead up to winter.

The river basin, the size of France and Spain, accounts for 41 percent of Australia's agriculture, 90 percent of the country's irrigated crops and A$22 billion worth of agricultural exports.

Turnbull acknowledged the drought meant more surface water was needed to replenish ground water systems, which have suffered because of a seven-year dry spell across large parts of eastern Australia.

Heffernan told the Australian Financial Review newspaper that scientists appeared to have double-counted the amount of water likely to flow into the Murray-Darling because they did not account for the link between underground and surface water.

"Forty percent of the inflow into the Murray-Darling comes from ground water. So when you have been accounting for it as a separate resource, this is a serious error," Heffernan said.

Heavy rains in the southern Murray-Darling Basin in late April lifted hopes that water shortages might soon end. But May storages in major dams remained near record lows of around 12 percent capacity, the Murray-Darling Basin Commission said.

The latest water warnings come as New South Wales state, which has more than 80 percent of its farmlands in drought, told about 100 towns along the Murray and Darling rivers to impose tougher limits on how residents used water.

People in Australia's main cities are already enduring water restrictions, including bans on washing cars and outlawing the use of sprinklers to water gardens. But most riverside towns have only voluntary water-saving measures.

New South Wales state Water Minister Phil Koperberg wrote to to 20 regional councils to demand they implement the top level of water restrictions before July 1.

In northern Queensland state, miner Rio Tinto Ltd./Plc. on Wednesday said it would cut 160 jobs at its Tarong coal mine because its customer, Tarong Energy Corp, would cut power generation by 70 percent to conserve water.