New Zealand Prime Minister John Key on Monday accused dairy giant Fonterra of delaying in sounding the alarm over products tainted with a potentially fatal bug, as investors sent the company's shares tumbling.

Fonterra revealed on Saturday that a whey product used to make infant formula and sports drinks had been contaminated with a bacteria that can cause botulism, prompting immediate action from China, a major market for New Zealand's dairy products.

Key said he was concerned at the impact on farm-reliant New Zealand's reputation as a supplier of "clean, green" dairy products, particularly in Asia where its infant formula has long been regarded as gold standard.

He said it was difficult to understand why Fonterra did not act immediately when tests last year showed there were problems with three batches of whey.

"I'm a bit staggered that in May of 2012, when this whey was produced, that it (Fonterra) did show something in its testing, but clearly not something that was of concern to the company because they allowed it to go out," he told Radio New Zealand.

"You would have thought that for a business where its top business is essentially based around consumer confidence, food safety and the quality of its products, that they are risks that you wouldn't take."

He said the government had a team of more than 60 personnel working to contain the fallout from the contamination and would eventually seek a "forensic" examination of how Fonterra had handled the crisis.

The Fonterra Shareholders' Fund fell 8.7 percent at the open on the New Zealand stock exchange as investors had their first chance to react to the scare, later recovering slightly to be down 5.9 percent at NZ$6.70 around midday.

The countries that the contaminated whey was exported to include Australia, China, Malaysia, Saudi Arabia, Thailand and Vietnam.

New Zealand officials say China has blocked all imports of its milk powder, while there are also reports that Russia has recalled Fonterra products and advised customers not to buy them.

Fonterra said there had been no reports of illness linked to consumption of the tainted product, which contains the bacteria Clostridium bolulinium, which can cause botulism, an infection that can lead to paralysis and death if left untreated.

The company has blamed the contamination on a dirty pipe at a North Island processing plant.

The New Zealand Infant Formula Exporters Association said none of the products made by its members were affected but it had been caught in a global backlash due to the poor quality of information being released by Fonterra.

"There wasn't full and frank disclosure right at the beginning and this has led to a lot of rumours spreading in the marketplace, which is what we're seeking to counter now," spokesman Chris Claridge told TVNZ.

New Zealand is the world's largest dairy exporter and the NZ$10.4 billion ($8.1 billion) sector accounts for about 25 percent of its exports.