Gov. Chris Christie conditionally vetoed the legislation and ordered state officials to begin the process of drawing up regulations to ensure that "fracking" is conducted safely.
"Without today's decision, New Jersey would have become the first state with a permanent hydraulic fracturing ban," Hal Bozrath, executive director of the Chemistry Council of New Jersey said in a written statement. "That would be no way to encourage natural gas production the nation so desperately needs."
Fracking has raised alarm among environmentalists and residents of gas-producing areas of the United States because of the potential contamination of underground water supplies. The natural gas industry contends fracking is necessary to crack into extensive shale-gas reserves.
Christie this week imposed a 12-month moratorium on fracking while state and federal regulators look into industry practices and develop a new set of rules.
The Chemistry Council said New Jersey was the 11th-largest consumer of natural gas in the nation, relying heavily on it for electricity and chemical production.