Telecom has been fined $500,000 for breaches of the Fair Trading Act.
The company on Monday pleaded guilty to 17 charges over claims made in 2006 when it promoted Xtra's Go Large broadband plan.
The Commerce Commission says Telecom and Xtra claimed the plan gave users all the internet they could handle and maximum-speed internet.
However, investigations into complaints from Xtra customers found that the internet speed was constrained - in some cases to dial-up speed.
The commission's fair trading manager, Graham Gill, says the fine is the largest Telecom has ever faced under the Fair Trading Act and shows the company is a repeat offender.
Mr Gill says the fine should serve as a warning to other companies that goods and services should live up to any marketing hype.
With increasing choice in the broadband market, it is important that all relevant information is disclosed to consumers so they can make informed decisions, he says.
Telecom says its accepts and regrets that some of the advertising was misleading.
The company has already paid about $8.4 million in compensation to approximately 97,000 customers affected and stopped offering the Go Large plan to new customers in February 2007.