John Key will lodge a formal correction in Parliament later this month after backing down on a claim today he was not informed a Government security agency spied on Kim Dotcom before his arrest.
It was revealed last week the Government Communications Security Bureau (GCSB), which is only supposed to spy on foreign nationals, had been snooping on New Zealand resident Dotcom ahead of a raid on his Coatesville mansion in January.
Key said he was only informed about the illegal spying on September 17, but the Prime Minister confirmed today there were references to the bureau's role in the raid on February 29.
The Prime Minister will now have to lodge a formal correction in Parliament on October 16.
Shearer said Key not being able to recollect seeing a point made about Dotcom was not a case of "brain fade", rather it indicated the Prime Minister was misleading the public.
"It points to the Prime Minister not telling the truth. His credibility and integrity, and the entire intelligence network that he heads, are seriously in question.
"Just a few days ago, John Key was quite happily dumping on the guys at the bottom in a desperate attempt to avoid scrutiny of his own role. Yet today we have proof that there was failures at the very top," Shearer said.
Documents released as part of a review by GCSB Director Ian Fletcher show Key went to the GCSB offices to watch a presentation about its broader capabilities.
A photo of Dotcom was used in the presentation and the bureau's involvement was listed as a possible discussion point on a document used by a staff member.
Key said he never saw the discussion point document and neither he or Fletcher could recall Dotcom being mentioned at the meeting.
No written record of the discussion was kept and Key said he has "been clear from the outset that I received no briefing on the operation from GCSB prior to 17 September, and this review confirms that."
"While neither the GCSB Director nor I can recall the reference to the Dotcom matter being made during my visit to the bureau back in February, I accept that it may well have been made."
The internet tycoon tweeted today: "It might be time for a second Amnesia song. Remember the last one? 'That politician got amnesia again'," referring to a song he made over his donation to John Banks' 2010 mayoral campaign.
Green Party co-leader Russel Norman said Key had either misled the public over the spying or was not doing his job as Prime Minister.
"The Prime Minister has sole democratic oversight of the GCSB but can't remember being told about it's involvement in the Kim Dotcom raid.
"It's his duty and his job, as spelled out in law, to control the functions of the bureau. His hands-off approach also apparently extends to not paying attention when he is told important information," Norman said.
The bureau has also been reviewing all cases where it has helped the police since changes to the immigration law in 2009. Key said there are three cases which need further investigation because the legal position is not "totally clear".
Key's admission about the February meeting comes amid claims from Shearer that senior Government figures knew about the illegal spying of internet tycoon Kim Dotcom, but only a full independent inquiry will reveal the truth.
So far there are three investigations into the saga, but Shearer told TV ONE's Breakfast the inquiries would not provide the "right" answers.
"We're targeting the little guys at the bottom and not looking at the accountability in our intelligence agencies that should be in place and that goes right to the top, to Bill English and John Key," he said.
"(There) are a series of people who should have been responsible, who should have known, and I think they did know. But we're not going to find that out necessarily until we have an (independent) inquiry."
Inspector-General of Intelligence and Security Paul Neazor's report established the facts of the case, while Secretary of the Cabinet Rebecca Kitteridge has been seconded to the GCSB for an initial period of three months to see if its systems need updating.
Yesterday the police also said they will be looking into the case to see if any criminal charges should be laid.
But Shearer said the police were "conflicted" because they asked the GCSB to spy on Dotcom in the first place. He said an independent figure with authority needs to be in charge of an inquiry.