The discovery this week, at a family home on Collins St, East Botany, suggests the impact of chemicals company Orica's 50-year residence at its Botany Bay plant is worse than first thought.
The Department of Infrastructure, Planning and Natural Resources (DIPNR), which issues licences for the water, already expanded the no-go zone for residential bores a year ago amid growing concern about Orica's legacy of poisonous waste.
On Wednesday it was reviewing the "extraction exclusion zone" again after one bore outside the enlarged danger zone was found to be supplying a house with water unfit for human consumption.
"We need to have further investigation," DIPNR spokeswoman Isabelle Bennett said.
"In the meantime, until we find out, we won't issue any more licences."
Information on how many licences were pending were not immediately available. As well as thousands of homes and public amenities, Sydney's biggest companies rely on the licences for everyday industrial use.
The order to suspend new licences was made this week by senior DIPNR officials but NSW Infrastructure, Planning and Natural Resources Minister Craig Knowles was not involved in the decision, Bennett said.
The underground water near the Orica site might still be declared suitable for industrial purposes if not for residential purposes, she added.
It was not known how long the suspension would remain in place.
Residents and industry have used the Botany Aquifer as an alternative supply for decades, but now face another crippling setback on top of drought-related water restrictions.
Orica, which is spending $167 million to clean up contaminated groundwater under its Botany industrial site, had been testing nearby residential bores for a year, under pressure from the NSW government.
So far it had tested 39 bores after contacting residents by dropping leaflets in their letterboxes.
"We have detected EDC (ethylene dichloride) in residential bores previously. This one's just outside the (government-regulated) boundary. That's the issue," company spokesman Stewart Murrihy said.
The toxic substance was detected at a measure of four parts per billion, compared with the Australian Drinking Water Guideline limit of three parts per billion, Orica said.
The unnamed householder, who lives at the house with his family, was believed to have used the bore to water his garden and lawns.