Key said current laws did not address the risk posed by radicalized fighters returning to New Zealand after exposure to the Islamic State (IS) organization, also known as ISIS or ISIL.
"We know that a small number of New Zealanders have traveled overseas to engage in the fighting. We're also aware of people within New Zealand who have a desire to travel and fight for ISIL," he said.
"Although the number of New Zealanders in these situations is modest compared with the actual numbers of our partners, they are significant relative to New Zealand's size."
Key said that, as a result, authorities had lifted the terrorist threat level in New Zealand from "very low" to "low", the third level on a six-rung scale, meaning an attack was considered "possible, but not expected".
The conservative leader said New Zealanders could not be complacent about the threat from returning fighters or people who may have fallen under the influence of the IS jihadists' "sophisticated" recruitment propaganda through platforms such as the Internet.
"If anyone believes that there's no risk of a form of domestic terrorism here, then they're actually deluded," he said.
Key refused to say how many New Zealanders were believed to be fighting for the IS group at the moment, how many had returned to the country and how many had been prevented from going overseas because they intended to join the jihadists.
He said the government had ordered a four-week review of laws relating to foreign fighters and would look at issues such as whether security agencies had sufficient powers to "investigate, restrict and disrupt" their activities.
The review would also examine the Australian and British responses to the foreign fighter issue to determine if new criminal offenses needed to be created to deal with the threat, he said.
"What's disturbing about what we're seeing in this area is just the pace of change. Just six to 12 months ago, this was a far less significant threat than it is today. That's true
internationally, if you look as ISIS two years ago it was a vastly different organization to the one we see today," he added.

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