The Government's intelligence agency is under investigation for illegally intercepting information in the Kim Dotcom case.
Prime Minister John Key has ordered an inquiry into breaches made by the Government Communications Security Bureau while it assisted police to investigate Megaupload founder Dotcom over piracy charges.
The bureau used illegal methods to locate certain individuals who were later issued with arrest warrants. The Crown has filed a memorandum in the High Court.
Key said he was disappointed unlawful acts had taken
"I expect our intelligence agencies to operate always within the law. Their operations depend on public trust," he said.
"I look forward to the Inspector-General's inquiry getting to the heart of what took place and what can be done about it.
"Because this is also a matter for the High Court in its consideration of the Megaupload litigation, I am unable to comment further."
Key said he was informed about the illegal breach by the Director of the Government Communications Security Bureau on September 17, eight months after the Kim Dotcom case came to light in New Zealand.
Megaupload founder Kim Dotcom was arrested, along with three others, in January after police raided his rented mansion in Coatesville, Auckland, at the request of the FBI.
The avid tweeter took to the social blogging site minutes after Key made the announcement saying: "I'm now a real life James Bond villain in a real life political copyright thriller scripted by Hollywood & the White House."
He also tweeted: "The Truth Will Come Out - Kim Dotcom - This Is Just The Beginning."
The German national is facing extradition to the United States for his role in megaupload.com, which US Federal prosecutors say has cost copyright holders more than $620 million in revenue lost through pirated material.
After Key was told about the breach, he said the matter was then referred on to the Inspector-General Hon Paul Neazor - the independent authority charged with investigating any illegal breaches by the Government's intelligence agency.
Key said he has also asked the Inspector-General to recommend any measures to prevent the issue from happening again.