Rochelle Nason with the League to Save Lake Tahoe says the new policies allow for too many new roads and homes at the expense of the lake's clarity.
She says the lake would be polluted with increased ozone emissions, airborne dust and erosion.
"One of the immediate effects of the plan would be to allow for a much greater level of paving than is currently permitted. Right now there are restrictions on how much of a lot you can cover. That helps with water quality. It also helps with soil conservation and vegetation."
Nason says the plan approved by the city council in May is illegal because the Tahoe Regional Planning Agency didn't sign off on it first…as required by a federal bi-state compact.
The environmental group's legal challenge was filed in federal district court in Sacramento.
South Lake Tahoe city officials are not immediately commenting on the lawsuit.