The number of people on the Government's watchlist for their involvement with, or support of, Islamic State (IS) has taken the Federation of Islamic Associations by surprise, a spokesperson says.
Mr Key today ruled out sending New Zealand soldiers into combat roles in the fight against IS.
However, military planners - three of whom left for Iraq yesterday - would gather information from allied bases in the region and report back to ministers on whether New Zealand should have a role training Iraqi troops to fight the jihadists.
If they decided on that option, Special Air Service troops could be sent to Iraq to protect them, Mr Key said.
He also said 30-40 people were on a Government watchlist because of their involvement with or support for IS. A further 30-40 people who were not on the watchlist required further investigation.
They were a mix of immigrants and New Zealanders, and five were fighting for IS in Syria while others were IS supporters who had had their passports cancelled to prevent them leaving New Zealand.
Mr Key said others were involved in funding terrorism, radicalising others or were becoming radicalised themselves.
Federation of Islamic Associations vice-president Javed Khan said the number was far higher than they thought.
"We are really concerned. It's up to 80 who are under the radar, and that is a huge number that we are taken by surprise," he said.
"Our intelligence showed around five to eight people who may have got some connection with IS or terrorist organisations."
Mr Khan said he was worried about the wider effect on Muslims in New Zealand.
"We hear said that there are about 80 people (on the lists)," he said.
"This may have a greater implication on the Muslim community because to somebody who is not part of the Muslim community, that person can look at any member of the Muslim community and say 'well this person may have some links to terrorism'.
"It's just stigmatising."
Labour MP David Shearer said it was a slippery slope to getting directly involved in a war by sending military personnel in a training role to Iraq.
Labour's preference was to provide humanitarian assistance and diplomatic efforts via the United Nations Security Council, he said.
"It's a slippery slope once you start in that sort of deployment.
"The second thing to remember is that the US spent billions of dollars in 10 years in training and didn't get anywhere, and I think we have to look at rather than going there to appease our Five Eyes partners, it would be better to look at where IS is vulnerable, where they're able to take oil out of the country."
Professor Robert Ayson, of the Victoria University's Strategic Studies centre, said Mr Key may have over-emphasised the domestic risk.
"My worry is the tendency to turn this into something bigger than it really is," he said.
"I know the Prime Minister mentioned 30 people on a watchlist and another 30 who might join that list.
"That's not an insignificant number but I think I'm concerned that a security policy that's so much focussed on a response to Islamic States risks skewing things."
New Zealand First leader Winston Peters said IS would think that New Zealand was at war in Iraq because sending military to train troops was boots on the ground - despite what Mr Key said.
"We're engaged in war now. That's the perception that IS will have, and any reasonable person in the Middle East will have the same view," Mr Peters said.