The Waitangi Tribunal wants the Government to halt the partial sale of Mighty River Power, saying the partial privatisation would affect the Government's ability to make redress to Maori rights in water.
It has called for an urgent national hui to find solutions to questions around how Maori rights over fresh water are recognised.
The tribunal this afternoon issued its report on claim brought by the council and ten hapu and iwi which sought to delay the Government's partial asset sale programme or "mixed ownership model" until Maori claims over water were duly considered.
In its report, the tribunal's presiding officer, Chief Judge Wilson Isaac, tells Mr Key and his Government: "In the national interest and the interests of the Crown-Maori relationship, we recommend that the sale be delayed while the Treaty partners negotiate a solution to this dilemma".
The tribunal said Maori were not claiming to own all water everywhere, but that they had residual proprietary interests in particular water bodies. It found in favour of that view but said the extent of those interests still needed to be established.
Another key issue considered by the Tribunal was whether the sale of up to 49 per cent of the shares in Mighty River Power and other power companies would affect the Crown's ability to recognise Maori rights over water.
While shares by themselves would not give meaningful recognition of those rights, they would do in conjunction with other measures, the tribunal said.
That, it said, established there was a nexus or link between shares in Mighty River and other power companies to be partially privatised, and Maori rights.
The tribunal said it was uncertain that Maori rights would recognised by means that did not involve shares in the power companies. It also said the Crown's ability to use shares to recognise those rights would be removed by the sale.
Therefore, to proceed with the sale would be a breach of Treaty principles.
The report was fast tracked by the tribunal at the request of the Government which is running out of time to meet its target of selling up to 49 per cent of Mighty River Power by the end of the year.
But the tribunal recognised the Crown's wish to press ahead with the sale and recommended it "urgently convene a national hui in conjunction with iwi leaders, the New Zealand Maori Council, and the parties who asserted an interest in this claim to determine a way forward".
The scope of negotiations at the hui would need to be limited "if a timely solution is to be found".
While it wouldn't be possible to devise a comprehensive scheme for the recognition of Maori rights in water in the time available, "it should be possible with good faith endeavours on both sides, to negotiate with all due speed an appropriate scheme in respect of the three power generating companies".
In the "narrowest view" the subject for discussion would be shares and shareholder's agreements in Mighty River Power.
Elsewhere in his preface to the report, Judge Isaac offered a thinly veiled rebuke to Prime Minister John Key over his comments about the Maori Council's claim, including that it was "opportunistic".
"There has been much criticism in the public arena of Maori making this claim,but what we say is that property rights and their protection go to the heart of a just legal system", said Judge Wilson.
"This is not an opportunistic claim."
"In our view, the recognition of the just rights of Maori in their water bodies can no longer by delayed. The Crown admitted in our hearing that it has known of these claims for many years and has left them unresolved."
State Owned Enterprises Minister Tony Ryall said ministers would consider the report as they prepared to make decisions in early September about the Mighty River Power share offer.
"As previously agreed, the Government and the Maori Party will jointly discuss the report as part of developing their respective responses to it."
However Mr Key has note a number of times in recent months that the Government is not bound by the tribunal's recommendations and may choose to disregard them.
Maori Party co-leaders Tariana Turia and Pita Sharples said they welcomed the report but would not be making any comment until they had discussed the findings with the claimant groups and the Government.By Adam Bennett Email Adam