(Updated to include Arch Coal's response to the EPA ruling, and to provide further detail regarding Alpha Natural Resources' 2011 guidance, issued on Friday.)

NEW YORK ( TheStreet) -- With the government getting tough on coal mining companies in Appalachia, investors chose on Friday to take money out of a sector that has posted outsized share-price gains over the last few months.

The Environmental Protection Agency announced Thursday that it would block Arch Coal ( ACI) from using a controversial method -- known as mountaintop removal -- to extract coal from its Spruce No. 1 mine in Logan, West Virginia.

Shares of St. Louis-based Arch were declining 4% Friday afternoon to $34.12, on heavier-than-average volume of nearly 5 million shares. The stock had touched its 52-week high -- $36.50 -- on Jan. 3.

Other coal-mining outfits saw their stocks fall even more severely. Alpha Natural Resources ( ANR), which issued some mixed 2011 guidance on Friday, was losing more than 7%, Patriot Coal ( PCX) was shedding 6%, and Walter Energy ( WLT) was off 5%.

Massey Energy ( MEE), Peabody Energy ( BTU), and Consol Energy ( CNX) were each stumbling by around 4%.

The declines come after several weeks of sharp gains for coal stocks. The severe flooding in Australia's Queensland state has disrupted mining in that region, home to one of the world's most important coal fields. As global prices for coal -- especially the variety used in steelmaking -- have jumped, so have the stock prices of domestic miners.

Meanwhile, blizzards and cold weather on the east coast of the U.S. have also caused railroad delays, which has trimmed the supply of coal on the market, pushing prices even higher, though this has been a mixed blessing for mining concerns involved in the trade.

Investors appeared to use the EPA decree as a reason to take profits.

Under the Clean Water Act, the EPA ruled that the Spruce mine would ruin streams in the region with millions of tons rubble produced by the dynamite-mining technique, which the industry views as cost efficient and therefore necessary. By revoking Arch Coal's permit, the EPA said it would "prevent the mine from disposing of the waste into streams unless the company identifies an alternative mining design that would avoid irreversible damage to water quality and meets the requirements of the law."

The status of the Spruce mine has been contested in court since the permit was first applied for in the 1990s.

Arch Coal said it would fight the EPA's decision and would "vigorously defend" the permit's legality with continued litigation.

"Absent court intervention, EPA's final determination to veto the Spruce permit blocks an additional $250 million investment and 250 well-paying American jobs," the company said in a statement. It added that the EPA ruling would have a "chilling effect" on future investment in U.S. mining.

As for Alpha Natural Resources, the company said Friday that the Australian flooding had caused a spike in export demand for its coal. It now expects to ship as much as 14.5 million tons of coking coal in 2011. Prior guidance had called for 13.5 million tons.

But the company put a damper on that positive forecast by quantifying the rising costs that it and the rest of the U.S. coal industry have been experiencing this winter. Alpha said its cost of coal sales in 2011 could come in 8% higher than what it had earlier predicted. Bad weather and railroad delays on the eastern seabord this winter have added to miners' expenses.

The same problems forced Arch Coal to issue a fourth-quarter profit warning earlier this week. The company blamed its shortfall on railroad snafus in the East and lower-than-expected production at another one of its mines, called Mountain Laurel.

-- Written by Scott Eden in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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