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He has also revealed that individuals who had trained here before travelling overseas to training camps are currently be monitored by New Zealand authorities.
Mr Key told More FM this morning that some people in New Zealand had been trained by al-Qaeda in places such as Yemen. In "the real world", powers to spy on civilians were necessary, he said.
Speaking to the Rotorua Daily Post while on a visit to the city today, Mr Key said most New Zealanders would accept there were small numbers of people with links to the organisation living in this country.
"People have trained in New Zealand and gone off to those camps and that's just the way things are.
"We live in a global environment where there are real threats.
"While it's very narrow and very small in number the facts of life are New Zealand is not immune from those potential risks.''
Mr Key would not reveal how many people were involved, or give their names, but said some of them could be New Zealand citizens and they were already being monitored.
"There are small numbers of radicalised New Zealanders who have either gone over to those environments or returned and I don't think this is terribly new. Some are off-shore and some are in New Zealand.''
Mr Key said those being monitored had not necessarily broken the law.
"The fact some of them might have a link might be the sort of reason why the Government raises a warrant to observe their behaviour.''
Mr Key said he had signed warrants to observe people from New Zealand who were currently in Yemen and that he knew who they were.
"There are very specific and unique examples where we know that there is a threat or a potential threat and we have to take those responsibilities seriously.
"We take the appropriate steps for anyone that the Government genuinely believes presents a risk and that's why we have the SIS and the GCSB.''
Labour leader David Shearer would not confirm whether he had been briefed about an al-Qaeda presence in New Zealand, but said Mr Key was simply politicking to try to give the impression that the controversial GCSB bill was required.
"I think it's yet another one of those episodes when John Key is in a hole, he brings out the weapons of mass distraction. Bringing up threats to national security like this - it's not the type of thing you'd usually expect the Prime Minister to raise on breakfast radio."
He said New Zealand's intelligence agencies were already monitoring any such risks, regardless of the bill, which was to be debated by Parliament again this afternoon.
"I can't really see his point. Like he has done with weapons of mass distraction, the Boston Bombings, this, all of this is supposed to give the inference that somehow we are unprotected unless he passes his legislation. I think that is very misleading and politicking over an area we shouldn't be politicking over."
As leader of the Opposition, Mr Shearer is briefed on security matters but the talks are in confidence and he said he would not breach that.
"Of course we have security threats to New Zealand, like there are in almost every country. But we also already have security agencies equipped to deal with it, and they are dealing with it."
Labour has called for a full review of the intelligence agencies and the way they work together before any law changes are made.
Otago University head of politics Professor Robert Patman said while it could not be ruled out that some members of the public were being trained by al-Qaeda, "it's difficult to know whether the Prime Minister is accurate in his depiction of New Zealand members of al-Qaeda''.
"But that actually, is not really the point. The point, I think is that many people are concerned that we're creating a national security state in order to deal with what is a relatively minor threat.''
Prof Patman said the Government was weakening the principles which were the key to a democratic system.
"Those principles play a key role in legitimising and distinguishing democratic rule from the activities of terrorist groups such as al-Qaeda, which are dedicated to destroying, precisely those values.''
The threat to the country's security was apparently "relatively minor", Prof Patman said.
"You can't have major laws to deal with the odd person in New Zealand who represents a potential threat.''
There needed to be a "delicate balance'' between maintaining democratic freedoms and being vigilant against terror threats, he said.
- by Matthew Martin of the Rotorua Daily Post, Claire Trevett of the NZ Herald, and Rebecca Quilliam of APNZ