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Speaking after the preliminary results of the referendum were announced last night, Mr Key launched a staunch defence of the $26 million project, as opposition leaders accused him of "tainting" the vote and "dividing the country".
The vote was 56.6% to 43.2% for the current national flag, with 2,124,507 people casting votes - a turnout of 67.3%.
Mr Key, who had campaigned for the Kyle Lockwood-designed silver fern flag, said that flag had been lengthy and considered.
Asked whether the referendum process had been worth $26 million given it led to no change, he said it had sparked an "enormous", healthy debate across the country. "You can't shy away from a debate or a discussion about nationhood," he said.
Just because the referendum did not produce the outcome he wanted "doesn't mean it wasn't a worthwhile process", he said.
"We ... as a country had a nationwide discussion about our flag, about nationhood, about what we stand for. And I think that's been an important discussion we not only should have had, but must always have.
"I don't think we should shy away from ... contentious issues just because they are by nature contentious."
Mr Key said he would now be supporting the current flag. "What this process has shown over the last three or four months is that we as a country can get out and fly our flag. We can use it, and we can show the world how proud we are of New Zealand.
He added: "So my only request to New Zealanders now would be to rally behind the flag that's been chosen by the majority of New Zealanders. To go out and use it, to wave it, to be proud of it, and to celebrate the fact that we've got an amazing country."
Mr Key said he did not think the defeat would be a black mark on his legacy, but said his government would not be revisiting the issue. "It certainly won't come back to Parliament while I'm the Prime Minister. I'm certainly not a fan of becoming a Republic ... so that's a decision for a future government to make."
Major failure for Key, say Greens
Green Party co-leader Metiria Turei said the flag result was a major failure for the Prime Minister. "John Key's overt campaigning for his favourite flag tainted the referendum from the outset and cost all New Zealanders the opportunity to get a new flag.
"Lots of New Zealanders support a change of flag but voted for the current one because the Prime Minister's interference ensured they weren't given a proper choice. John Key alienated people by politicising the process and attacking those who didn't like his choice of flag."
Labour leader Andrew Little said the flag project had "divided the country" and "become a personal crusade".
"At every stage of the process John Key screwed the scrum in favour of his flag. He made his desire for a fern flag known from the outset. Panel members were admittedly influenced by this and three of the four flag options featured ferns.
"When New Zealanders said they wanted a straight yes/no vote in the first referendum, he failed to listen. He failed to treat the public with respect and put his personal agenda first. Time and again we heard voters say there were higher priorities for the $26 million the referendum cost taxpayers."
NZ has spoken. We're keeping the flag. Now let's get back to focusing on the real issues.— Andrew Little (@AndrewLittleMP) March 24, 2016
New Zealand First leader Winston Peters, who has been a staunch supporter of the current flag, said the country had now spoken, and people should unite behind the existing flag.
When the final result is confirmed on Wednesday, it will bring to a close a two-year process which culminated in the first-ever public vote by a country on its national flag.
Mr Key launched the flag referendum in a speech at Victoria University in March 2014. Polls at the time showed New Zealanders supported a change to the century-old national flag. New Zealand First aside, Parliament was also overwhelmingly in favour of change.
The main opposition throughout the process has come from military veterans. As World War I commemorations took place last year, the Returned and Services Association (RSA) urged the public not to dump the flag that young soldiers fought under.
Last night the RSA said it was delighted but not surprised at the referendum result.
RSA national president BJ Clark said the decision to keep the existing national flag was "an inspiring, strong show of democracy in action".
"New Zealand service personnel sign up for a number of reasons, but one of the foremost of these is to safeguard the continuing of our way of life," Mr Clark said.
Lockwood flag off Harbour Bridge
The silver fern flag has been removed from the Auckland Harbour Bridge and would also be taken down from public buildings around the country after its defeat in the referendum.
After the Black, White and Blue Silver Fern flag was picked as the finalist for a new national flag in December, the Government took the rare step of permitting it to be flown on the Harbour Bridge.
This honour was usually limited to the national flag, the Tino Rangitiratanga flag, the Australian flag and the Merchant Navy flag.
Another 250 silver fern flags have been distributed around the country - to council buildings, airports and ports - and these were expected to be taken down over the next week.
The flag's creator, Melbourne-based New Zealander Kyle Lockwood, did not want to comment until the final result was released.
Mr Lockwood said earlier this week he would remain optimistic of victory right until the last minute. If his flag lost, he said it could be turned into a beach towel.
Barely an hour after the referendum result was announced, 61 Kyle Lockwood flags are up for sale on TradeMe. However, many appear to be long-running auctions by official flag sellers.