New Zealand demanded answers Thursday about how a false test reading triggered a botulism scare for diary giant Fonterra that forced global product recalls, describing the episode as a costly embarrassment.

Officials sounded the alarm earlier this month after tests showed batches of whey power produced by Fonterra were contaminated with the potentially fatal bug clostridium botulinum.

Infant formula was pulled off shelves from China to Saudi Arabia as New Zealand's reputation for producing the gold-standard foodstuffs that command top prices in Asia took a battering.

But it was revealed on Wednesday that subsequent tests had proved the contaminant was in fact a non-toxic bacterium called clostridium sporogenes and there had never been any danger to consumers.

"The whole thing's been an embarrassment to New Zealand," Trade Minister Tim Groser told Radio New Zealand, as the opposition accused his government of overseeing a "botulism botch-up".

"I've never tried to conceal the fact that it was going to cost us -- the question was always 'how long, how much?'"

With New Zealand reliant on the dairy industry for 25 percent of its exports and the prospect of compensation lawsuits from affected companies looming, Groser said it was important to prevent such mistakes occurring again.

"The consequences of this particular false positive have been very grave and we want answers as to why on earth this happened," Groser said.

Fonterra said on Wednesday the initial test that incorrectly detected botulism and sparked the crisis was done by AgResearch, a government agency.

The Ministry for Primary Industries said it was too early to draw any conclusions about the quality of AgResearch's laboratory testing but the issue was being investigated.

"We are fully focused on getting to the bottom of this and actually providing the sort of clarity that consumers and overseas markets require," acting director-general Scott Gallacher told TV3.

The opposition Labour Party said the false alarm occurred because the government had failed to ensure New Zealand's food testing and monitoring labs were world-class.

"This fiasco continues to be a disaster for our clean, green brand. The inability of the ministry's systems means our reputation is always at risk," said Labour primary industries spokesman Damien O'Connor.

"While New Zealand was right to take an immediately precautionary approach, our international competitors will be laughing all the way to the bank."

Infant formula maker Nutricia, which recalled its Karicare brand product because it used Fonterra whey powder, said the belated all-clear vindicated its own testing regime, which had never shown any sign of botulism.

Managing director Corine Tap said the scare had been an "awful time" for both the company and parents who used the product, refusing to rule out legal action to seek compensation over the recall.

"We are considering our legal position," she told reporters, adding that she did not have figures on how much the recall had cost the company.

Fonterra is sensitive to contamination issues after a 2008 scandal in which six children died when a Chinese company it part-owned illegally laced milk with the chemical melamine. It has adopted a similar stance on the possibility of legal action.

Prime Minister John Key said everyone involved should wait until investigations into the false alarm were completed before laying blame.

"Rather than have lawyers at 10 paces, we should let the inquiries do their job," he told reporters.