The Ministry for Primary Industries says test results have confirmed bacteria found in Fonterra products three weeks ago was not capable of causing botulism.
This comes after weeks of disruption to the dairy trade, worth about $2 billion in China, and other key export markets. The saga has been described by the Labour Party as Fonterra's Botch-up-ulism.
Infant formula was taken off shelves in several countries after initial tests showed whey protein concentrate had been tainted with the bacteria Clostridium botulinum, which causes botulism. However, the latest results show it was its benign relative, Clostridium sporogenes.
MPI says a total of 195 tests using a range of technologies have been conducted in labs here and in the United States, and have come back negative for C. botulinum.
Acting director-general Scott Gallacher says when they received the information on 2 August that Fonterra had detected C. botulinum in some of its products he immediately adopted a precautionary approach to protect consumers.
MPI commissioned further tests, which came back negative. "The definitive tests that we have now received," Mr Gallacher told a media conference on Wednesday afternoon, "show that the bacteria taken from the potentially affected product provided to the ministry by Fonterra and AgResearch are not Clostridium botulinum, as first thought."
Mr Gallacher says MPI informed overseas regulators of the results on Wednesday. He says the mistake will be investigated by both the ministry, and the ministerial inquiry.
"I can't comment at this stage on what the understandings or expectations were of the tests which Fonterra had commissioned from AgResearch. Clearly that is a matter which we are going to look into."
He later told Checkpoint it was a food quality problem rather than a food safety problem and if it had been identified correctly at the time there would have been no recall.
Fonterra's chief executive Theo Spierings, speaking at a media conference following the MPI announcement, says he's relieved there was never any risk to any consumers.
He says his company did the right thing by recalling the products and an operational review is still underway to paint a clearer picture of exactly what happened.
Mr Spierings says he has key questions to ask AgResearch, which conducted the first round of tests that raised the alarm.
In a news release, Fonterra said speculation had been growing overseas and in New Zealand that the new round of tests commissioned by MPI after Fonterra's global recall showed negative results for Clostridium botulinum.
Fonterra said it made a formal and urgent request to the ministry to release initial results received from additional testing that was commissioned by MPI following Fonterra's precautionary recall earlier this month.
Trading in the Fonterra Shareholders Fund was halted on the NZX at the request of the dairy company and will resume when it opens on Thursday.
Botch-up-ulism, says Labour
The Government says it's confident the ministry did not overreact. Economic Development Minister Stephen Joyce says he stands by how MPI handled the scare.
"Completely comfortable with it. If you've got a food company, irrespective of who they are, who pops up to the regulator and says by the way we've got some concern that we might have some botulism in our products and we've got some early tests that show it could be - what would you guys be saying if the regulator sat on their hands for two or three weeks and just let the product stay on the market."
Labour's Primary Industries spokesperson Damien O'Connor, though, describes the scare as Fonterra's Botch-up-ulism.
"The good news in this story is no consumers were harmed by the consumption of New Zealand dairy products," he says. "Nor it seems were they ever likely to be.
"But our failure to ensure the highest standards of testing, monitoring and auditing means the damage has been done to New Zealand's international reputation."
Fonterra trading again in Sri Lanka
Fonterra has resumed its consumer operations in Sri Lanka, saying it believes it is safe for its staff there now.
A court-ordered ban on the sale and advertising of Fonterra products, imposed after claims the agricultural chemical dicyandiamide (DCD) had been detected in milk powder, was lifted on Saturday.