In a major speech on national security in Wellington this morning, Mr Key said agencies had a watch list of between 30 and 40 people who were "of concern in the foreign fighter context".
"These are people in, or from New Zealand who are in various ways participating in extremist behaviour".
Some of the people on the watch list had travelled to join wars in the Middle East and had remained there. Others were supporters of the Islamic State and the Levant (ISIL) who had attempted to travel to Syria but had their passports cancelled.
Others on the list were involved in funding terrorism, radicalising others or becoming radicalised themselves.
Mr Key said a further 30 to 40 individuals who were not on the watch list required further investigation.
Mr Key ruled out sending troops to the Middle East in a combat role.
New Zealand will instead send military planners to determine whether New Zealand can play a role in training local security forces.
This approach was previously taken in Afghanistan, where some military personnel are still working with local forces.
In a statement, Defence Minister Gerry Brownlee said: "We acknowledge that some form of capacity-building is clearly required if Iraq is to have a future as a law-abiding democratic country and this will need to include a modern Iraqi military to maintain peace and security."
Government announced a review of foreign fighters security settings for "foreign fighters" last month.
Today, Mr Key outlined some of the law changes New Zealanders could expect as part of the urgent law changes.
The Security Intelligence Service (SIS) would be able to conduct emergency surveillance for up to 48 hours without a warrant in urgent cases.
The SIS would also be able to carry out video surveillance of private properties, similar to police powers in the Search and Surveillance Act.
The new legislation would give the Minister of Internal Affairs power to cancel passports for up to three years, and temporarily suspend passports for up to 10 working days in urgent cases.
Government has also committed to $7 million more in funding for the SIS to increase the number of staff working on investigations.
Officials would also consider whether a new criminal offence could be created for foreign fighters, as in Australia.
This issues required a longer time frame to consider, Mr Key said.
He described the changes as "responsible and narrow" and said they would be subject to a sunset clause.
Mr Key said the rise of such a well-resourced, globally-focused terrorist group which was highly skilled in social media recruitment was a "game changer" for this country.
"ISIL exposes us to a type of threat that we lack both the legislative tools and resources to combat."
He was limited in what information he could reveal, but said there were individuals here who were attracted to carrying out similar attacks to those seen in Australia and Canada.
"Even those radicalised New Zealanders who have been prevented from travelling are a distinct threat to our safety and security.
"People who are prevented from performing terrorist acts abroad can turn their minds to terrorist acts at home, as the people of Canada experienced in recent weeks."
By Isaac Davison of the NZ Herald
