Megaupload founder Kim Dotcom accused New Zealand Prime Minister John Key of lying when he appeared in parliament to denounce plans to let intelligence agencies spy on local residents.

Dotcom was giving evidence to a select committee chaired by Key, which is examining a bill to reform intelligence services following revelations that government agencies illegally spied upon the Internet mogul last year.

It was the first face-to-face meeting between Dotcom and Key, whose government signed off on the businessman's arrest by armed police last year for alleged online piracy.

Wearing his trademark all-black outfit, Dotcom arrived at parliament in a limousine after flying from Auckland to Wellington by helicopter for the hearing.

He began by admonishing Key for only giving him 15 minutes to testify, rather than the 25 he had been promised.

He went on to accuse the prime minister of fibbing when he (Key) denied any knowledge of Dotcom prior to his arrest in Auckland in January last year as part of a massive US investigation.

"You know I know... why are you turning red, prime minister?" Dotcom asked Key, prompting the prime minister to fire back at the portly tech guru: "Why are you sweating?"

Outside the hearing room, Dotcom said the privacy concerns raised by his evidence were more important than any personal issues between Key and himself.

His voice at times shaking with emotion, Dotcom testified that he had been the victim of "massive overreach" by the Government Communications Security Bureau (GCSB) and the proposed reforms would make it easier to abuse surveillance powers.

"We should avoid blindly following the US into the dark ages of surveillance abuse," he said, referring to US intelligence leaker Edward Snowden's revelation of a vast surveillance programme to covertly collect phone and Internet data.

Under existing laws the GCSB is supposed to focus on foreign intelligence and cyber-security, and is explicitly forbidden from spying on New Zealand citizens or residents.

But it was revealed last year that it spied on Dotcom, a German national with New Zealand residency, before his arrest.

As a result Dotcom is suing the spy agency and the government has moved to close what it described as a technical loophole that limited the operations of its main spy agency.

Key denies it gives spies greater powers, saying it allows the GCSB to cooperate more closely with agencies such as the police and military in an increasingly complex cyber-security environment.

He said that under the reforms, the GCSB would share information between government agencies in the same way Dotcom's now defunct Megaupload file-sharing site once allowed Internet users to share files.

Dotcom rejected the analogy.

"On Megaupload you would share a file, on the GCSB spy cloud you share private information on citizens that you don't have any right to access, that's the big difference," he said.

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