Federal Indigenous Affairs Minister Jenny Macklin is rejecting an application from Aboriginal groups seeking to create their own breakaway land council.
"I am not satisfied that the applicants could satisfactorily perform land council functions," Ms Macklin said in a statement on Thursday.
Land councils acquire and manage traditional Aboriginal lands and are involved in negotiating with miners and other groups who want to use those areas.
About 30,000 Aboriginal people live in the NLC's region, which covers 563,000 square kilometres of land.
But groups associated with the Jawoyn Association Aboriginal Corporation had been seeking to create their own group, to be called the Katherine Regional Land Council, which would have covered about 80 per cent of that land.
Nobody from the Jawoyn Association, which has recently had key members linked to corruption allegations, could be reached for comment on Thursday.
Ms Macklin said she wanted her department and the NLC to discuss the concerns from those wanting the new land council.
"The applicants believe their expectations are not being met under the current arrangements," she said.
NLC chairman Wali Wunungmurra welcomed Ms Macklin's decision to reject the proposed land council.
Mr Wunungmurra said the move would pave the way for a major project to pipe natural gas to power an alumina refinery in Gove to go ahead.
"Minister Macklin's decision was (a) show of confidence in the NLC's capacity to perform its functions and deliver economic outcomes for all traditional owners," Mr Wunungmurra said.
NT Country Liberals senator Nigel Scullion said the Gillard government should leave it to Aboriginal people to determine if they want a new land council.
"That is the problem with the Gillard government, they just don't listen to the Aboriginal people," Mr Scullion said.