Some residents living near Stradey Park have opposed the homes

As a public inquiry opened, the agency - which had opposed the scheme because it said the site was in a flood risk area - said its position had changed.

It said it followed recent assembly government decisions on similar applications and new internal advice.

Inspector Clive Nield said his inquiry at Llanelli Town Hall was likely to last between a week and 10 days.

In a letter sent to Mr Nield on Friday, the agency said it had objected to the application on the basis that it was a "highly vulnerable development in an area designated as a C2" (at risk of flooding).

But it said because of decisions made by the assembly government in similar cases and recent Environment Agency Wales internal guidance, it had taken a new stance.

"Subject to our comments regarding the alleviation of flood consequences, we will no longer be maintaining an in principle objection," the agency said.

The future of one of the most famous clubs in the world rests upon this decision Stuart Gallacher

About 100 people attended the opening of the inquiry in Llanelli's town hall.

The Scarlets want to develop the ground to help the club pay for a new 15,000 capacity stadium on the other side of town.

The club's counsel, Jeremy Cahill QC, told the hearing: "The Scarlets' case, supported by Carmarthenshire Council and now not disputed by Environment Agency Wales, is that there is no reasonable grounds for refusal of this proposal based on flooding."

'Flooding problems'

Scarlets chief executive Stuart Gallacher said the club's future depended on redeveloping the land to pay for a new stadium.

He said without it the club would at best become semi-professional but without loans would fold.

He said this would lead to penalties from the Welsh Rugby Union and could see it sued by its own players who were on long contracts.

"The future of one of the most famous clubs in the world rests upon this decision," he said.

"The implications of refusal will not only lead to the folding of the club and a major embarrassment for Wales across the sporting world, but will also signal a major lost opportunity for the economy of Wales."

But some living nearby say housing on such a scale would causing flooding and the over-development of the area.

The residents action group claims the housing scheme will cause flooding problems and conflicts with national planning policy.

The Scarlets and Carmarthenshire Council plan on jointly building the stadium on the opposite side of town.

But the club needs the receipts from the sale of Stradey Park to help pay its share.