Prime Minister Helen Clark has revealed expatriate businessman Owen Glenn told her in February that Winston Peters had approached him for money.
Parliament's privileges committee is looking into whether Mr Peters had failed to disclose a $100,000 donation from Mr Glenn.
The New Zealand First leader has rejected evidence from Mr Glenn that he asked the businessman to donate money to help pay Mr Peters' legal costs.
Miss Clark said on Thursday the matter had already been reported in the news media and she discussed it with Mr Glenn when he was in New Zealand for the opening of Auckland University's business school.
She said she rang Mr Peters, who assured her he had not approached Mr Glenn for money.
Miss Clark said though she takes Mr Peters at his word, she is critical of his political management of the issue.
And she says she would like to see the controversy cleared up quickly.
National Party leader John Key says Miss Clark has a lot of explaining to do about why she withheld this information for so long.
More questions are expected in Parliament on Thursday as the pressure goes on Mr Peters to defend the allegations.
And the ACT Party leader Rodney Hide says Miss Clark should have done more to reveal the truth behind the donation.
Mr Hide says Miss Clark's revelation is a "new low" in New Zealand politics.
"The Prime Minister of New Zealand has to exercise her judgement and put principal first and power second," he says.
"She actually doesn't need Mr Peters to get through the rest of this parliamentary term. She should stand up for what is right and put ethics before power."
Key won't deal with NZ First
Mr Key on Wednesday ruled out New Zealand First as a potential coalition partner while allegations against Mr Peters go unanswered.
By declaring this, Mr Key has put the focus on Miss Clark's continued support for her Foreign Affairs Minister. He has also questioned the integrity of Miss Clark over her handling of the affair, saying she should sack Mr Peters as a minister.
Mr Key said he would consider doing a deal with New Zealand First only if Mr Peters came up with a credible explanation for the $100,000 donation by Mr Glenn.
Asked the chances of getting such an explanation, Mr Key replied: "Extremely low." He said there is no way he could have Mr Peters in a government he leads.
He told Morning Report on Thursday it is up to Miss Clark, not the privileges committee, to decide how viable Mr Peters' position is and backed an accusation by National's deputy leader Bill English that the Prime Minister has known about the donation all along.
Mr Key says he had to think very hard about the decision to exclude Mr Peters from any possible coalition. However, he says Mr Peters has failed to offer an explanation for the donations, and he cannot see any motivation for Mr Glenn to lie to the privileges committee.
The Prime Minister says she retains confidence in Mr Peters, and the fact he remains the Foreign Affairs Minister reflects that. Miss Clark says she has asked him for an explanation of the conflicting statements, but for now it is a matter for the privileges committee.
The Green Party says the privileges committee has a duty to protect the integrity of the political system as it investigates possible conflicts of interest involving donations to Mr Peters.
Party co-leader Russel Norman, who is on the committee, says the public relies on politicians to protect democracy and make sure it is not unduly influenced by money.
Dr Norman says he hopes the committee will make a ruling on Mr Peters before Parliament rises, but says it should not rush its work and a proper process must be followed.
New Zealand First MP Pita Paraone believes National's position on Mr Peters will have no impact on the party's survival. Mr Paraone says he fully supports his leader and National's comments put the idea of good faith negotiations in doubt.
Peters rejects evidence
On Wednesday, Mr Peters rejected evidence from Mr Glenn that Mr Peters asked him to donate money to help pay the MP's legal costs.
Mr Glenn has written to Parliament's privileges committee, which is looking into whether Mr Peters had failed to disclose the donation from Mr Glenn.
The committee has met for a second time to consider Mr Glenn's letter and Mr Peters' response. Chairman National MP Simon Power released the letter after the committee's meeting on Wednesday morning.
"The nature of that evidence appears inconsistent with the evidence given by Mr Peters and (his lawyer) Brian Henry. The committee has also received a statement in response from the Right Honourable Winston Peters," Mr Power says.
In the letter, Mr Glenn says he made the $100,000 contribution in 2005 at Mr Peters' request. But in his response, Mr Peters, who is also the Minister of Foreign Affairs, says that statement is not correct. However, Mr Glenn says Mr Peters sought his help during a personal conversation.
National's decision 'unwise'
Mr Peters says the National Party's decision to rule out working with him after the election is unwise, telling Parliament on Wednesday that John Key is trying to behave tough, while leaving himself a "wriggle out clause."
"Why would the leader of a party with so-called senior members on this privileges committee wait till they hear the evidence? And the answer is that they know they're going to lose," he told Parliament.
Mr Peters says he is happy to appear before the privileges committee again to address a conflict of evidence between himself and Mr Glenn.