The Prime Minister made a scathing attack on Israel and imposed tough diplomatic sanctions after two alleged Mossad spies were jailed for passport fraud yesterday.
"The New Zealand Government views the act carried out by the Israeli intelligence agents as not only utterly unacceptable but also a breach of New Zealand sovereignty and international law," Helen Clark said.
The sanctions, including suspending all high-level visits to or from Israel, came minutes after Uriel Zoshe Kelman, 31, and Eli Cara, 51, were sentenced to prison for six months for stealing the identity of a tetraplegic man to obtain a false New Zealand passport.
Helen Clark said there were "very strong grounds" to believe the men were acting for Israel's intelligence services.
The case was revealed by the Weekend Herald in April.
Last night Israel's Foreign Minister Silvan Shalom said, "We are sorry about this matter. It will be dealt with and all will be done to restore Israel's long history of good relations with New Zealand to their previous correct ties."
Mr Shalom did not address the claim that the two convicted men were linked to Israel's intelligence services.
In court both men denied having links with spy agencies, such as Mossad.
Helen Clark said: "If one were to lay espionage charges, one would have to be prepared to offer the kind of evidence in court which our intelligence agencies don't like coming forward to display.
"We have very strong grounds for believing these are Israeli intelligence agents."
The sanctions are high on the scale of diplomatic displeasure between Governments, although they avoid targeting the 6000-plus Israeli tourists who visit New Zealand each year.
All Israelis coming to New Zealand on Government business must now obtain visas, Foreign Ministry consultations with Israel have been suspended and the Government has declined an approach for Israel's head of state, President Moshe Katsav, to visit in August.
Helen Clark said the case was a "sorry indictment" on Israel, with which New Zealand had long shared friendly relations.
"We regard it as an unfriendly action by agents of the Government of Israel, aimed at undermining New Zealand's sovereignty and certainly breaching international law.
"While we regret the need for it, New Zealand has no option but to take the actions that it has in response to a deliberate breach of its sovereignty.
"This incident has seriously strained that relationship and it will remain strained for some time."