I'm a little more dubious about the below than Mike is. Because of what has been exposed in the Zaoui case, I am deeply suspicious of the SIS's competence and motives. More importantly, it is abhorrent that any government agency can arbitrarily block someone from citizenship without independent oversight. Shouldn't there be a court involved in the process somewhere?

As for danger, the SIS has said that it is not concerned about domestic terrorism in these cases. If they were, they would already have informed the Minister of their concerns under sections 7 (1) (f) - 7 (1) (h) of the Immigration Act 1987, and requested that he revoke residency on the grounds of "administrative error" (which includes being covered by section 7, and hence not being eligible in the first place). The fact that they haven't done that - prefering instead to blame the Immigration Service - suggests that they don't think there is a danger (or alternatively, don't think their evidence would withstand scrutiny by the courts).

Reading between the lines, I think the worry is more about the damage that could be done to New Zealand's international reputation (and the access of New Zealand citizens to other countries) if people-that-other-people-think-are-terrorists are seen to be travelling on a New Zealand passport. Note that the people don't actually have to be terrorists for such damage to occur; Ahmed Zaoui would almost certainly fall into the same category.

I am however intrigued that the SIS - an organisation which normally refuses to say anything, even to a court - has raised this. You'd almost get the suspicion that they're trying to play politics...

Update: I should also add that it seems unfair to attack the Immigration Service over this; they can hardly be blamed for refusing entry on the grounds that people were dangerous when they (and the SIS) didn't know or think that at the time.