Foreign Minister Murray McCully has confirmed the embassy in Sweden will close next month and other European posts will be told to move to cheaper offices as part of a bid to save $10 million a year.
The embassy changes are part of a wider review of the Ministry of Foreign Affairs which Mr McCully said was required for the ministry to meet the Government's expectation it find a total $24 million in savings and exist on its current budget for at least the next two years.
Mfat staff are expected to be told today about the final decisions by the Cabinet on the proposed restructuring.
Papers leaked to Labour's foreign spokesman, Phil Goff, showed the cuts hadbeen scaled down significantly from theoriginal proposal - including halving the number of job cuts from 304 to 146 and reversing the decision to slash diplomats'allowances.
Mr Goff said the cuts in Europe could jeopardise attempts to get a preferential trading agreement from the European Union and warned against putting all the focus in the Asian markets at the expense of traditional markets.
Other posts expected to be closed include Madrid and the Hague, while posts in Warsaw, Vienna and Rome will be downsized and some of the property at the Paris Embassy will be sold.
Mr McCully defended the decision to close the Stockholm Embassy, which was set up by Labour only four years ago.
He said the relationship with Sweden was excellent "but in today's world it is not always necessary to have a diplomatic presence to maintain such a relationship".
Mr Goff said Mr McCully appeared to have a change of heart, given that 11 months ago, he had said that post should be kept.
"Asia is important, but it's also really important that we don't have all our eggs in one basket," Mr Goff said.
"We've learned that from past history and we need to make sure we are maintaining and extending our access in all important markets - not just one of them."
Mr McCully said the changes reflected the need to change to meet "current and future foreign policy and trade priorities".
He released part of a Mfat paper presented to the Cabinet which warned that changing overseas representation "must not be at the expense of key traditional relationships in Europe".
However, although the most growth was expected to happen in Asia with its growing middle class, New Zealand's foreign representation "reflects the balance of New Zealand's interests last century".
About 26 per cent of Mfat's expenditure was in Europe ($63.9 million) and although spending on Asia was higher than that ($75.1 million), only 7 per cent was in the Middle East and Africa ($18.8 million), which accounted for 40 per cent of the countries in the world.