In a legal opinion published by Friends of the Earth (FoE) last week, Robert McCracken QC said that the policy does not comply with the EU urban waste water treatment directive.
McCracken warned that the "irrational" policy "fetters the discretion of the Environment and Heritage Service in such a way that it cannot fulfil its statutory obligations".
In 2002, environment minister Dermot Nesbitt told the service not to object to applications on the grounds of sewage pollution. This policy has continued under his successor, Angela Smith.
FoE is calling on the minister to conduct a full review of the policy and wants a moratorium on development in areas most at risk from sewage pollution.
Antrim, Armagh, Bangor and Omagh are among the places most likely to be affected. John Woods, Northern Ireland director of FoE, said: "It is a poor reflection on ministers that FoE has had to seek a legal opinion to stop uncontrolled sewage pollution."