The numbers officially out of work eased back from a 13-year high at the end of 2012.
But the fall in the unemployment rate was due to more leaving the workforce than new jobs being created.
The numbers of those deemed officially unable to find a job fell by 10,000 to 163,000 in the final three months, figures released by Statistics New Zealand on Thursday morning show.
As a result, the unemployment rate fell from 7.3% of the workforce to 6.9%.
The Household Labour Force Survey shows that employment fell by 23,000, led by there being more women out of work.
It was the third consecutive quarterly fall, taking those employed as a proportion of the workforce to a 10-year low.
The unemployment rate fell only because even more people gave up looking for work than lost jobs.
In all, 33,000 people dropped out of the workforce in the final three months of 2012 - the highest number to do so on record.
Meanwhile Auckland bucked the national trend, with unemployment falling as a result of more jobs being created. There were 20,000 new jobs created in the city in the final three months of 2012, which pushed the unemployment rate there down to 7.2% even as its workforce grew in size.
The drop in employment sparked a fall in the New Zealand dollar, which was down a third of a cent to US83.8c following the release of the figures, and by the time the markets closed on Thursday it was at US83.68c.
ANZ Bank senior economist Sharon Zollner says it's clear that the labour market is weak.
She says there was an odd situation where employment fell for the quarter but the unemployment rate improved.
Ms Zollner says what was behind that was a very sharp fall in the participation rate which in itself is not a particularly good sign of the labour market's health.