Prime Minister John Key denies he was made aware in July last year of the possibility the Government's spy agency might have been acting unlawfully.
A report into the Government Communications Security Bureau (GCSB) has questioned the legality of 56 spying operations involving 88 people.
Mr Key has always maintained that he was first told in September 2012 about the bureau's illegal spying on internet entrepreneur Kim Dotcom.
Speaking from China on Tuesday, Mr Key said Inspector-General of Intelligence Paul Neazor had raised red flags with GCSB director Ian Fletcher in July about whether the law governing the bureau was adequate when it was doing surveillance work for the Security Intelligence Service.
On Wednesday Mr Key clarified his comments, saying that in his discussion with Mr Fletcher at that time, the director had not raised the possibility of illegal actions by the bureau with him.
"What I said (in September) was absolutely correct. I never had any advice that they acted illegally, and what was raised in July was that the Inspector-General had raised a question about how the GCSB Act might work with the SIS Act".
Mr Key denied that he was made aware in July of the possibility that the spy agency had acted unlawfully - only that the law governing its actions may be inadequate.
PM's story changing daily - Opposition
Opposition parties say they don't believe John Key when he says he knew nothing about possible illegal conduct by the GCSB before September last year.
Labour and the Green parties says Mr Key's story has changed day to day - and it is clear that some sort of warning was given to him in July 2012.
In Parliament on Wednesday, Labour's deputy leader Grant Robertson said New Zealanders can no longer trust the Prime Minister.
"They can no longer trust his word and they can no longer trust that he is acting in the interests of New Zealanders. John Key knew in July 2012 that New Zealanders may well have been illegally spied upon."
Outside the House, Labour leader David Shearer said there are real questions about Mr Key's conduct. "He knew about the spying much earlier on, he sat on that, he hid it and didn't stop it, and then tried to cover it up."
The review by Cabinet Secretary Rebecca Kitteridge, released on Tuesday, was ordered after it was revealed that the surveillance of Mr Dotcom, a German national with New Zealand residency, in January 2012 was illegal.
In 2003, a law change prohibited the GCSB from spying on New Zealand citizens or permanent residents.
The report finds that most of the problems stem from a misguided belief that when assisting domestic agencies that rule didn't apply.
Of the questionable operations, 55 involved assisting SIS and one involved the police.
Key looking at law change
The Prime Minister has suggested that the GCSB should be able to spy on New Zealanders if it has the right oversight.
The bureau is prohibited by law from spying on New Zealand citizens or permanent residents.
John Key has confirmed that some of the people who were the subject of legally questionable GCSB operations were New Zealanders or New Zealand residents.
Asked if he thought the GCSB should be able to spy on New Zealanders, Mr Key said it should be able to provide agency support for the Security Intelligence Service under the right conditions and with the right oversight.
Former intelligence and defence policy analyst Paul Buchanan said the the Kitteridge report talks about strengthening the bureau to improve its oversight, but doesn't go far enough.
"The oversight mechanism should be removed from the purview of the Prime Minister. It should be independent, autonomous and more than likely under the control of Parliament."
A former deputy secretary at the Ministry of Justice says a great deal of criminal activity is international and intelligence gathering agencies across the globe have to share information.
Warren Young told Radio New Zealand's Nine to Noon programme on Wednesday the view that the GCSB should never engage in intelligence gathering in relation to New Zealand residents or citizens is unrealistic.
Labour and the Greens have criticised Mr Key's intention to change the law and both parties want an independent inquiry before any changes to the law are proposed.
Greens co-leader Russel Norman says the Government is taking the wrong approach. "When other people break the law we prosecute them. When the GCSB breaks the law we say we'll change the law. That's just wrong."
Inquiry into source of leak
The Prime Minister has asked the Department of Prime Minister and Cabinet to talk to the State Services Commission about the leaking of a report into the GCSB.
A copy of the report was leaked to Fairfax Media, forcing John Key to release it on Tuesday, earlier than he had intended.
The State Services Commission has already set up another investigation into leaks from the Ministry of Foreign Affairs and Trade.