The Government and its flagship asset sale programme will not be held hostage by Rio Tinto over the mineral giant's threat to close the Tiwai Point aluminium smelter, Prime Minister John Key said yesterday.

After his Government's offer to Rio Tinto of a taxpayer-funded sweetener was rejected, Mr Key went on the offensive, rejecting Opposition claims his Government's commitment to its partial asset sales programme meant the smelter owner had it over a barrel.

Should Rio Tinto follow through on its threat to close the smelter if it doesn't get cheaper power from Meridian Energy, many believe power prices would fall, reducing the profitability and value of the power companies the Government is partly privatising.

Labour leader David Shearer said the Government had ignored warnings that it needed to sort out the issue before putting Mighty River Power on the market.

"Rio Tinto simply waited and now holds all the cards in its negotiation."

But Mr Key indicated he would rather the smelter close than pay out a long-term subsidy to Rio Tinto.

Labour was suggesting his Government "should be held hostage to Rio so that they can force the best deal out of us because we're somehow worried about the mixed ownership model programme".

"Well that's not true.

"This has got nothing to do with the programme. In Australia they don't have a mixed ownership model programme going and yet they've been negotiating successfully, I might add, with five different smelters." In Australia, Rio Tinto-owned Pacific Aluminium has negotiated big concessions from the federal and state governments.

Mr Key said the offer of a short-term subsidy was driven by his Government's belief there was some benefit in an "orderly transfer" if the smelter was closed "but we're not interested in a long-term subsidy like the Australian Government".

He said the possibility of the smelter closing would be disclosed in the Mighty River offer documents which would be released this week and he did not believe it would affect the price of Mighty River shares.

What was important was that analysts fully understood what could happen, what the impact on the value of companies may be and they could then give investors advice accordingly.

He said the potential closure of the smelter, which uses 15 per cent of the country's power, was not a new issue and would not necessarily be a bad outcome for the economy especially as it would be five years before the smelter could be fully closed.

"Over the long run it's quite possible that that power could be used by new ventures," he said.

It would also allow for the closure of less productive and more expensive power stations.

Mr Key acknowledged the smelter's closure would have "quite a big impact on the Southland economy".

The smelter employs 750 directly but is estimated to support a total of about 3000 jobs in the region.