Prime Minister John Key said reports of anti-Israel Hebrew writing on test missiles used by Iran were "provocative" and the issue was threatening to undermine growing trust in Iran after the dropping of sanctions.
Mr Key met with Iran's Foreign Minister Mohammad Javad Zarif yesterday and said they briefly discussed the missile testing.
Mr Key said the historic nuclear deal forged with Iran that resulted in the removal of sanctions had opened up opportunities to rebuild trust and it was important all parties involved did not take steps to undermine that.
"The point we would make is that there is a body of trust and goodwill building up at the moment and we think that runs the risk of undermining that process a bit."
He suspected a soldier rather than the Government was responsible for Hebrew script, which Iran's media have reported said "Israel must be wiped off the Earth".
"It's an unhelpful and far from useful action," Mr Key said.
The Security Council was due to decide this week whether Iran has breached any resolutions by testing missiles because of their range.
The issue has overshadowed Dr Zarif's tour of the Asia Pacific, which was aimed at rebuilding relations after the dropping of sanctions on Iran. Speaking during an Institute of International Affairs function last night, Dr Zarif defended Iran's missile testing programme and denied it was in breach of any Security Council resolutions or the nuclear deal.
He had not known the testing was scheduled and said it was "routine" activities by Iran's military, the Islamic Republican Guard.
He had not checked the veracity of reports of writing in Hebrew but said it was the President and government ministers who set foreign policy in Iran and none of those people had articulated anything that could amount to a threat against Israel.
He defended Iran's actions, saying Iran had never invaded or threatened to use force against another country and did not intend to do so. However, it did have the right to defend itself.
Dr Zarif said although there was criticism of Iran for missile testing there was no similar criticism of Israel or the United States over threats of force. He said President Barack Obama's statement that "all options are on the table" was an implicit threat of the use of force. "Countries should not be allowed to threaten to use force but they are doing it as a matter of policy."
He said Iran's defence spending was a fraction of others in the region and the testing did not breach the nuclear deal.
A Security Council resolution that prevented Iran firing missiles capable of delivering nuclear weapons had been annulled and current resolution "asked" Iran not to test missiles designed to be capable of carrying nuclear weapons.
He said Iran did not have nuclear weapons so the missiles were not designed to carry them.
Dr Zarif also denied there was persecution of those of the Bahai faith in Iran, despite recent criticism in a report by the UN human rights special rapporteur. He said Western countries had "created an image" about human rights abuses in Iran but it was the only country in the region that had a UN special rapporteur on human rights and denied there was any discrimination or persecution of people based on religion, faith "or lack of faith."
Mr Key said that because of New Zealand's role on the Security Council he had also spoken with Dr Zarif about regional issues in the Middle East, including Syria, Yemen, Iraq and Afghanistan.
In his address to the Institute of International Affairs, Dr Zarif spoke of the "global menace" of Islamic State, saying all countries needed to work together despite differences of opinion toward the Syrian regime.
"I think it is possible and not only possible, it is absolutely imperative.
"Isis has become immense, not only a danger to Syria but to all its neighbours and from Sydney to San Antonio."
He likened it to a disease such as ebola, saying it would quickly spread.
Dr Zarif will travel to Australia where he is expected to discuss the return of Iranian asylum seekers to Iran. Dr Zarif said none would be forced to return to Iran and those who did would not be ill-treated.
"We do not have the responsibility of forcing people to come back. If our citizens want to come back to Iran we will accept them."