MPs passed legislation on Wednesday that strengthens the ability of overseas spy agency GCSB to operate on home turf, letting it surveil New Zealanders when it has a warrant from a domestic agency.
It was approved 61-59, with MPs split along party lines, and is likely to take effect in late September.
The government claimed its monitoring, which had previously been confined to foreign targets, was aimed at terrorism and organised crime.
But the New Zealand Council for Civil Liberties blasted the law as an unacceptable intrusion.
It "enables mass surveillance of New Zealanders and that's not acceptable in a modern democratic society," spokesman Thomas Beagle said.
"We seem to be buying into the surveillance society which has been exposed by Snowden in the US and the UK.
"I think we're on the wrong side of history on this one."
The New Zealand Privacy Commissioner and New Zealand Law Society had criticised the Bill before the vote.
The measure was in response to an inquiry last year which found the GCSB acted unlawfully by providing information on Kim Dotcom to US authorities before a raid on his home in early 2012.
Mr Dotcom founded the highly succesful online file-sharing site Megaupload.