The proposed open cut mine in Queensland's Surat Basin would produce 30 million tons of coal a year for the next 30 years.
Covering an area of 124 square miles, the project has been opposed by farmers who say it will displace agricultural land.
Environmentalists argued that increased greenhouse gas emissions from the mine and from the coal it produces should be taken into account, with Friends of the Earth saying that Wandoan would be responsible for 1.3 billion tons of greenhouse gas emissions over its life -- equal to twice Australia's annual emissions.
The project has received environmental approval from both state and federal governments and Xstrata is proceeding with the final stage of the mining lease application.
Tuesday's decision by Queensland's Land Court was one of the last hurdles for Wandoan, meaning that environmentalists and farmers lost their legal fight to stop the development of the project.
"The Land Court's recommendation acknowledges Xstrata Coal has followed a thorough and rigorous environmental assessment and review process throughout the development of the Wandoan Coal Project," Xstrata Coal Queensland Chief Operating Officer Reinhold Schmidt said in a news release.
Xstrata says the project will create 1,400 jobs during the construction phase and another 900 long-term jobs when operational.
"The project and its associated rail and port developments would help establish the Surat Basin as an internationally competitive coal export region," Schmidt said.
But Friends of the Earth said the decision to recommend the mine go ahead is a "huge disappointment."
"Xstrata did not contest the reality or impacts of climate change. They're planning on building this mine knowing that it will create the same amount of greenhouse gas emissions as 72 countries combined," said Friends of the Earth spokesman Bradley Smith. "It's unfortunate that our laws allow multibillion-dollar companies like Xstrata to ignore the outcomes of their reckless actions."
Friends of the Earth said it is considering an appeal.
Xstrata Coal Chief Executive Officer Peter Freyberg, in a speech earlier this month, was critical of anti-coal campaigns.
"Any impact on Australia's coal exports will be immediately offset by exports from other countries, which do not invest in low-emissions technologies and often produce lower-quality coal in a less-efficient, environmentally responsible and safe manner than Australia's world-class mining sector," Freyberg was quoted as saying by Australia's Business Day.