Updated | Deputy Premier John Barilaro backs down on threat to withdraw from Coalition over koalas policy

The NSW Coalition remains intact with Nationals leader John Barilaro backing down on his threat to take his party to the cross bench over the state's koala habitat protection policy.

Mr Barilaro conveyed the decision to Premier Gladys Berejiklian following a meeting of Nationals MPs.

A joint statement by Ms Berejiklian and Mr Barilaro said, "Following a meeting this morning between the Premier and Deputy Premier, the NSW Liberal & Nationals Coalition remains in place.

"This includes a commitment to supporting Cabinet conventions and processes.

"The matter will be dealt with at an upcoming Cabinet meeting."

Earlier

The dispute in the NSW Coalition over a koala habitat protection policy has reached flash point, with senior Nationals having to decide by 9am today whether they want to remain in cabinet or sit on the cross bench.

Premier Gladys Berejiklian issued the ultimatum late on Thursday.

"It is not possible to be the deputy premier or a minister of the Crown and sit on the crossbench," Ms Berejiklian said in a statement.

"If required, I will attend Government House tomorrow and swear in a new ministry.

"It is long-established convention that members of cabinet must support government legislation."

Deputy Premier and Nationals leader John Barilaro threatened his group of MPs would move to the cross bench over changes to the Koala Habitat Protection State Environmental Planning Policy, which he said hurt landowners and farmers.

Following the ultimatum, the Nationals met last night but reportedly did not reach a resolution and more discussions will be held this morning.

Mr Barilaro appeared to be wavering on Thursday night, telling Sky News Nationals MPs would not walk away from their responsibilities or "blow up" the Coalition government.

It was reported Mr Barilaro's leadership is likely to come under threat.

The Nationals say the policy, which became law in December last year, is limiting land use on farms and the ability to rezone areas for development because more trees are classed as koala habitat, which restricts the clearing of land.

"The National Party stands for a thriving koala population," Mr Barilaro said on Thursday.

"We actually want to see the population double. We are not anti-koala.

"This is somehow a way to sanitise the regions, attack the property rights of landholders and do absolutely nothing to support koalas."

The Nationals have proposed several changes to the policy including ensuring there is a reasonable definition of highly suitable koala habitat, separating private native forestry from the proposal and operating rural regulated land and agricultural production separately.

Labor leader Jodi McKay accused Mr Barilaro of "blowing up the coalition" and called for Ms Berejiklian to front the public to confirm the status of her government.

"It is my belief that the government is no longer functioning," she said.

With Australian Associated Press