The Transport Accident Investigation Commission has found that the pilot of a balloon that crashed in Wairarapa killing 11 people had used cannabis.
Pilot Lance Hopping, of Masterton, and 10 passengers died when the balloon they were in hit power lines and caught fire before plummeting to the ground near Carterton on 7 January.
Lead investigator Ian McClelland said a toxicology report confirmed Mr Hopping had cannabis in his system.
He said the presence of the drug has not been identified as the cause of the accident but is a significant safety concern.
Mr McClelland said further tests are being carried out to determine how much of the drug was present.
"The level of THC found in the blood of cannabis users varies widely between individuals," he said.
The continuing investigation will look at the certification and registration of balloons, their maintenance and airworthiness, and whether any malfunction contributed to the crash and the performance of the pilot and the balloon.
It will also examine wire strikes and fires in balloons, and look at the role of the regulator in overseeing safe ballooning activities.
TAIC chief investigator of accidents Tim Burfoot says the investigation team has consulted widely with ballooning experts, but not with all the country's balloon pilots as there are conflicts of interest.
The commission met families of the victims last week to inform them of the initial findings.
The Civil Aviation Authority says it is disappointed there was evidence of Lance Hopping's use of cannabis.
In March, the CAA released results of an initial investigation into maintenance practices for hot air balloons.
It had contacted all five active hot air balloon maintainers to seek assurance that safety standards were being met. The authority found most were carrying out maintenance correctly but one company was further investigated.
The Transport Accident Investigation Commission investigation is due to be completed by March 2013.
Drug testing likely - PM
The Prime Minister says it is likely mandatory drug testing will be introduced to the adventure tourism industry.
Cannabis was found in the system of the balloon pilot and in two of the jump masters on the skydive plane that crashed at Fox Glacier.
Mr Key says random drug testing looks to be necessary and he has instructed Minister of Labour Kate Wilkinson to look into the issue.
She says she would prefer the industry to go ahead and introduce random testing ahead of any legislation that could make it mandatory.
Ms Wilkinson says other industries like forestry are already performing random drug tests and that is working well.
Mr Key said it is almost certain that if new civil aviation legislation had been in place before the Fox Glacier crash the incident probably would not have happened.
Civil Aviation rules that came into effect last year required balloon and parachute drop aircraft operators to become certificated by 1 May this year.
Mr Key said the adventure tourism sector is fundamentally safe.
Mother of man killed upset pilot used cannabis
The mother of a man who died on his fiftieth birthday in the Carterton balloon tragedy says she was upset to discover the pilot had cannabis in his system.
Merle Hopkirk lost her son, Stephen and his partner Belinda Harter, in the crash.
She says she is not angry to learn that Lance Hopping was using drugs, but she and her husband are very upset.
Balloonists welcome testing
Balloonists say they would welcome compulsory random drug-testing of pilots.
President of the Balloon Aviation Association Martyn Stacey says the sector's reputation has taken a hit and compulsory drug-testing could lift consumer confidence.
TAIC has recommended promoting drug-testing of pilots to the Transport Ministry.
Transport Minister Gerry Brownlee says he will look into having that recommendation implemented.