New Zealand researchers have discovered that run-off from the agrichemical DCD may be harmful to some aquatic eco-systems.

The chemical, which has been suspended by its manufacturers after traces were found in milk product samples, was used on pastures to reduce nitrate leaching and greenhouse gas emissions.

A University of Otago study has found dicyandiamide (DCD) residues in streams in Otago's lower Taieri Plain in concentrations that cause natural nitrogen transformation processes to be disrupted in aquatic ecosystems.

Department of zoology researcher Marc Schallenberg conducted laboratory experiments showing that in a wetland system, the presence of DCD inhibits the processes of nitrification and denitrification - two natural processes that help to purify and detoxify waters.

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"While DCD's inhibition of nitrification on land is desirable as it reduces the amount of nitrate entering streams, its similar inhibitory effects within aquatic environments is undesirable, as this could lead to ammonia toxicity in fish and other species, or increased incidences of algal blooms," Dr Schallenberg said.

New Zealand's fertiliser companies voluntarily withdrew DCD products from the market after it was revealed that where cows have grazed shortly after DCD application, trace quantities have appeared in some milk samples.

Testing of 100 samples from Fonterra products last September revealed low levels of DCD residues in 10 samples of whole milk powder, skim milk powder and buttermilk powder made with milk from the North and South Islands.

The finding caused concern among international customers of dairy giant Fonterra, and last week the Government expressed concern about the potential damage to the industry's image.

This week, Westland Milk Products said that it had found traces of DCD in some of its goods.

"While we are assured by independent health authorities and the New Zealand Government that DCD is not a food safety risk we are very aware that for many of our customers any residue in milk products is undesirable," said Westland chief executive Rod Quin.