Sir Jerry later said he did not hear the comment.
Told of the report somebody had shouted "cut his head off" , Labour MP Shane Jones, who is from Northland, said: "The Maori word for mental illness is wairangi. I often wonder if some people have Wairangi Day, not Waitangi Day".
Mr Peters, who is Ngapuhi and usually sits with the marae hosts, said it was an occasion to pay respect to Waitangi Day and "you do expect people to turn it into their narrow protests year after year after year".
Asked if protesting when the Prime Minister arrived was justifiable given his role, he said such disruptiveness was not justified "no matter who the Prime Minister is".
"The Prime Minister is there to observe a country's national day. Those who would hijack it show a contempt for the country's institutions and the people who belong to them."
He said many of those responsible were from outside the area, but Northland leaders needed to take a stronger line.
A hikoi opposing deep sea oil exploration is scheduled to arrive at the marae at the same time as Mr Key.
Mr Peters said Waitangi was the wrong place for that protest, and the protesters held views that were not supported by the majority of New Zealanders.
But Green Party co-leader Metiria Turei said it was the appropriate time and place.
"Waitangi is all about Te Tiriti o Waitangi, and it hasn't been honoured.
"It is simply holding the Government to account."