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Squire, battling with personal issues recently, has made himself unavailable for selection for the All Blacks' 39-man squad for the opening matches of the Rugby Championship.
Seen as the All Blacks' first-choice No 6, the 28-year-old told Hansen that he didn't feel like he was ready to pull on the black jersey.
"Mate, I don't think I'm ready to play international football," Hansen recalled of their conversation.
"I said 'okay', and we had a bit of a chat about that which I won't repeat. At the end of it we agreed and I said 'righto, that's a pretty courageous conversation, well done, you get back on the park and play some footy and we'll make a decision from there'."
Squire, who has played 23 tests for the All Blacks, had earlier this season been a late withdrawal from the Highlanders' clash against the Jaguares - and their resulting tour of South Africa - with what coach Aaron Mauger described as "personal family issues".
That followed a rough run of injuries, which kept Squire out of Super Rugby for the majority of the season. A hip injury sidelined him for the opening month, and just as he was back into full training, he tore the medial ligament in his knee.
He returned to the Highlanders in time for the playoffs, putting in a superb performance in their playoff-clinching win over the Waratahs, but was then yellow carded in their eventual quarter-final loss to the Crusaders.
If Squire is to return to the All Blacks environment ahead of the Rugby World Cup, it would be his final games in the black jersey, having signed a two-year deal to join Japanese club NTT Docomo Red Hurricanes after the Cup.
The only other recent example of a player denying the selectors the chance to pick him in a black jersey is Brad Thorn, a lock who became an All Black great for his toughness and exploits during, among other tests, the 2011 World Cup final.
Thorn went from league in Australia to the Canterbury NPC team in 2001 and was picked for the All Blacks' end of year tour but pulled out due to his uncertainty at whether he was fully committed to rugby union.
He ended up playing 59 tests for the All Blacks from 2003-11.