Unemployment is up to a "shocking" 7.3 per cent as businesses lay off full time workers in tough times.
Following the announcement, trade unions have said there is a "national crisis" in jobs. Unemployment has now hit its worst rate since early 1999, 13 years ago.
Statistics New Zealand figures out this morning showed unemployment raced up to 7.3 per cent in the September quarter, from 6.8 per cent in the June quarter, mainly hitting Maori and teenagers.
In contrast, figures out today across the Tasman show Australian unemployment stable at 5.4 per cent.
Prime Minister John Key said the New Zealand figures were surprising and at odds with other data.
The figure was much higher than economists had expected, with unemployment forecast to stay under 7 per cent for the next year. They have said the job market has been stagnant for the past three years, staying between 6 per cent and 7 per cent since 2009.
The New Zealand dollar dropped more than half a US cent to just under US82c on the news.
ANZ Bank economists said the weak unemployment figure might see the new Reserve Bank governor Graeme Wheeler “open the door” to a possible interest rate cut in early December. But he was likely to wait till March to look at a broader range of figures before making a final decision.
“If it were not for the Canterbury rebuild, we would be calling for 50 basis points of cuts,” to 2 per cent, ANZ Bank said.
Infometrics economists said they expected it to be another year before there was a "significant improvement" in the job market.
The figures showing a 0.4 per cent drop in overall employment indicated that the economy could well be "moving in reverse", Infometrics said.
Key said the data was ''unusual''.
"In the end these things bounce around quite a bit... it's at odds with what most of the economists thought would happen."
Asked whether the data was wrong, he said only it was at odds with other information around.
"Like a lot of surveys, from time to time, it can produced usual data, let's see what happens in the next one. But it's not going to make the Government change tack."
The Government had an economic plan and was committed to it, he said.
"These are challenging international conditions ... but I don't think we should change course I think we're on the right track."
But it was a long-run plan and relied on other countries. "We are a quarter of 1 per cent of global growth; New Zealand can't do this on its own."
He didn't want to speculate of future unemployment figures.
Labour leader David Shearer says Key’s legacy will be the highest jobless rate in 13 years, when National was last in power.
Shearer said Key had promised to create 175,000 new jobs, but instead there were now 175,000 people looking for work.
“What will it take for National to admit its hands-off policies aren’t working?” Shearer said.
Green Party co-leader Metiria Turei said the shock rise was the “final nail in the coffin” of the National government’s economic credibility. The number of unemployed had risen 78,000 under the National government.
“The National government has failed New Zealanders: its economic record is in tatters,” she said.
There was an improvement in jobs in Canterbury, but the news in the rest of the country was grim. Excluding the impact of the earthquake rebuild boost in Christchurch, unemployment in the rest of the country jumped from 6.8 per cent to 7.6 per cent, according to ASB Bank economists.
The figures showed falling numbers in manufacturing and education sectors, and the construction sector is also weak, though should pick up soon due to the Canterbury rebuild and rising building consents in Auckland.
Council of Trade Unions Secretary Peter Conway said the jump in the unemployment rate showed the Government ''needs to act on jobs now".
"There are now 175,000 people unemployed, 294,900 jobless and over 113,000 people looking for more hours at work. This means that we have 400,000 people out of work or looking for more work. This is a national crisis," he said.
"These are not just numbers; they are people, and families. They deserve support and the Government needs to give urgent attention to the jobs plight now," Conway said.
Overall, the number of unemployed jumped almost 8 per cent - or 13,000 - in the three months to September, most of them men.
That was the equivalent of about 145 people a day over the three months joining the ranks of the unemployed.
Some bank economists pointed to a weaker economy in the September quarter, but had expected some improvement on the June quarter unemployment, which was seen as "too bad to be true". But the latest figures are worse.
Maori unemployment jumped from 12.8 per cent in June to 15.1 per cent, to be almost as high as Pacific Islander unemployment of 15.6 per cent, though that was little changed from June.
European unemployment was 5.4 per cent, only marginally worse than in June.
Overall, job numbers fell by 8000 in the past three months, according to new Statistics NZ figures. That reflected a 9000 fall in the number of men in work, with a slight rise of 1000 more women in work.
Most of the job losses were in full time work, down 14,000, more than wiping out an 11,000 rise in the previous quarter.
"The unemployment rate has stayed between 6.4 and 6.8 per cent over the past two years and has now risen for the third quarter in a row," industry and labour statistics manager Diane Ramsay said.
During the late 1990s recession, unemployment peaked at 8 per cent, but reached a high of more than 11 per cent in 1991.