The Prime Minister has accused Labour of considering doing a deal in 2007 with the Saudi businessman at the centre of the $11 million sheep farm controversy.
But John Key was forced to withdraw his accusation when Labour's deputy leader Annette King objected.
Mr Key came under further pressure during Question Time in Parliament about his government spending money on Hamood Al Ali Al Khalaf's farm, including flying sheep to Saudi Arabia.
The Government has argued it did so to avoid the possibility of being sued by Mr Al Khalaf, who it said had been upset by the previous Labour Government banning live sheep exports.
In response to questions from Labour leader Andrew Little, Mr Key said his government was not the only one which considered Mr Al Khalaf's complaint.
"It's not just this Government that was aware. Actually it was the previous Government and I encourage the member to look to his right and speak to Annette King and speak to Phil Goff because he will become very aware he has just been set up by his deputy leader."
Mr Key repeatedly said Labour had been considering how to respond to Mr Al Khalaf, prompting this question from the New Zealand First leader, Winston Peters.
"Why, if he's got all this ammunition that implicates the Labour Party in government and has this legal opinion that backs up his actions, why is he not prepared to show the public, rather than seeking to go on covering up for a blatant bribe?" Mr Peters said.
Mr Key said he was surprised Mr Peters had asked that question as he should be aware of the limitations put on ministers by the Cabinet manual.
Andrew Little then asked Mr Key this.
"Can he confirm that his government renewed the live sheep export ban in 2010?"
Mr Key said he could confirm that National had renewed the live sheep export ban put in place by Labour and repeated his accusation that Mr Little had been set up by Mrs King and Mr Goff.
That prompted Mrs King to raise a point of order, saying she took exception to Mr Key's accusation, which she said was a lie.
Mr Key then withdrew the comment.
The exchange ended when Mr Little asked Mr Key why he continued to have confidence in Foreign Minister Murray McCully, who Labour believed should resign over the affair.
Mr Key defended Mr McCully and said he had done absolutely nothing wrong.