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Indonesian authorities raised the Indonesian island's threat alert to the highest level yesterday after receiving "credible" information about a terrorist attack.
A spokeswoman for the Ministry of Foreign Affairs and Trade said the New Zealand Government was monitoring the situation and was liaising with Indonesian authorities.
Indonesia is responsible for the security of foreign nationals attending the commemoration, she said.
Bali's Deputy Police Chief Brigadier General Ketut Untung Yoga Ana told AAP that intelligence reports had pointed to a plot to attack the service, and that Australian Prime Minister Julia Gillard was a potential target.
"Based on credible information, the terrorists have planned to target the Bali bombing commemoration event with a terror attack."
More than 1500 police and military personal, including snipers, had been deployed around Jimbaran and Kuta.
Three New Zealanders - Mark Parker and Jared Gane, both 27, and Jamie Wellington, 31 - were among the 202 people killed when a bomb ripped through a popular nightspot in downtown Kuta, just over a year after the September 11 terrorist attacks in the US.
Eight New Zealand victims of the bombings were returning to Bali to attend the commemorations.
A spokeswoman for Foreign Minister Murray McCully said no next of kin of the dead New Zealanders were likely to attend the commemorations, although Australian-based relatives of Mr Gane were attending with the Australian delegation.
Mr McCully would also attend the service.
The New Zealand travel advisory has not changed from stating there is "some risk" to security in Indonesia.
The safetravel advisory recommended New Zealanders exercise a high degree of caution in Indonesia, including Jakarta and Bali, due to the continuing threat of terrorism.
All New Zealanders in Indonesia are urged to register their details at safetravel.govt.nz.