Israel is refusing to accept New Zealand's ambassador because he will also have contact with Palestinian officials.
While Israel insists it is upholding a long-established protocol, diplomats in Wellington say New Zealand's ambassador to Israel has had contact with Palestine since 2008 with no issue being raised.
Foreign Minister Murray McCully has confirmed that Israeli officials had advised in recent days that they would "not accept as ambassador a person who was also a representative to the Palestinian Authority".
Prime Minister John Key said he had received a "10-second" briefing on the matter, but he confirmed that it was his understanding that ambassador to Israel has historically handled relations with Palestine.
"My understanding of the position is the Israeli's are saying whoever is accredited to Israel. They won't accept if they are also accredited to Palestine.
"Historically the case has been whoever we accredited for Israel we also accredited for Palestine."
Key said may be "logistically" difficult for Israel and Palestine to have different representation.
"It would be obviously inconvenient for us if we couldn't do that."
Key shied away from answering questions on whether Israel was trying to direct New Zealand's foreign policy.
"I wouldn't want to read that at this point and whether we'd listen to them or not is a completely different issue. We just need to get some advice on it."
New Zealand maintains diplomatic relations with Israel through Ankara, the capital of Turkey.
McCully said the ambassador had maintained relations with both Israel and Palestine since 2008 and concerns had not been raised before.
"We are looking into what arrangements can be made to ensure we have appropriate representation for Israel and the Palestinian Authority," McCully said.
According to a report in Haaretz, Israel's oldest daily newspaper, Jonathan Curr, New Zealand's nomination to be ambassador to Israel, cancelled a planned visit at the last minute over concerns about his plan to visit to the Palestinian Authority, including president Mahmoud Abbas.
The Israeli embassy in Wellington has confirmed an issue, but denied the issue was one which had changed in recent days.
The embassy said in a statement that Israel "maintains good relations with New Zealand" and would strive to continue to.
"The issue in question is totally unconnected to the good relations between the two countries," the statement said.
"It is a protocol principle which has been in practice for many years and is applicable to all the ambassadors who are accredited to Israel."
The report in Haaretz said previous ambassadors to Israel from Wellington had made it clear that they maintained relations with officials in Palestine.
The Ministry of Foreign Affairs and Trade website makes it clear that the ambassador to Turkey also has responsibility for Palestine and Israel.
Curr was taking up the role because Taha McPherson, the previous ambassador, was recalled to Wellington to become Prime Minister John Key's foreign policy adviser.
Israel reportedly requested that a more junior official take responsibility for Palestine, offending Curr and sparking the cancellation of his visit.
New Zealand has had tense relations with Israel over the last decade, taking sanctions in 2004 after two men suspected to be Mossad spies were convicted of attempting to obtain New Zealand passports.
Several Israeli citizens fled New Zealand after the Christchurch earthquake, in what some security experts claimed could have been an attempted identity-theft mission.
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