Israeli spies convicted of trying to obtain false passports got off lightly in exchange for the return of several more illegally obtained New Zealand passports, Nicky Hagar's book claims.
Other People's Wars, was released yesterday and investigates New Zealand's role in the "war on terror".
The book claims that after the September 11 attacks, the Security Intelligence Service aligned its focus with US interests, concentrating on people like Ahmed Zaoui while oblivious to the Mossad operation.
Elisha Cara and Uriel Kelman were trying to obtain false passports, which Mossad agents have used to enter other countries and carry out missions, including assassinations.
Mr Hager's book says the Mossad mission was exactly what the SIS should have been investigating, but it was uncovered by an immigration official in 2004.
The Government at the time won a secret settlement, according to Mr Hager's sources.
"The most important part of the settlement was that the Israeli Government had returned several illegally obtained passports that had been obtained by Cara and his colleagues," the book says.
Cara and Kelman were convicted of passport fraud and served half of their six-month sentences.
In contrast the SIS kept a close watch on Algerian national Ahmed Zaoui, who spent two years in prison and three years on bail without being charged.
Another SIS case cited in his book is an unnamed Tamil Sri Lankan refugee whose cellphone was tapped, even though the New Zealand Government did not regard the Tamil Tigers as a terrorist organisation.
The man never faced charges.
Hager claims the SIS was effectively basing its work on the interests of the US and its allies, rather than New Zealand's national interest.
This was justified by a law change in 2003 that changed the goal of the SIS from acting in the interests of New Zealand to ensuring New Zealand was neither the victim nor the source of international terrorism.
"This included collecting information on students and directly approaching some suggesting they leave the country," the book says.
He outlines a case of an Iranian biotechnology student who was offered a PhD scholarship to Canterbury University in 2009/10, but whose student visa application was declined because of fears the studies could be used to make weapons of mass destruction.
This all occurred against a backdrop of a surge in resources for intelligence agencies in the aftermath of September 11, 2001; SIS staff doubled and its budget rose from $11.5 million a year to $38.1 million.
But Hager said the "bloodiest" part of New Zealand involvement in the war was from intelligence helping to identify targets in Afghanistan and Pakistan.
"We were lending our most qualified intelligence people from about two weeks after September 11.
"They were helping to produce targeting lists, working on electronic maps, noting where they'd got hits, and sending the information through to people who were sending the bombers."