Prime Minister John Key faced the first real test of his trip around the Pacific as tensions grew in the standoff over aid earmarked for tourism development in Niue.

After meeting Mr Key, Niue Premier Toke Talagi set an apparent ultimatum that if New Zealand did not release a $4 million aid package soon, he would seek help from China instead.

He also said in a speech at an official reception that if he lost next year's election because Niueans did not believe he had done enough, he would blame Mr Key.

Mr Talagi said the relationship was "excellent" but Niue was wasting its time if the funding did not become available soon and he would look to China.

"I don't think what we are talking about is a change in the way we associate ourselves with New Zealand.

"However, we may not be very happily disposed if we can't access the funds from New Zealand as quickly as possible. We've got to be able to look elsewhere to ensure we can develop our country as quickly as possible."

He said Niue's relationship with China was excellent and it had already provided help in some areas.

New Zealand has refused to provide the money until Niue can provide it with more details on how it will be spent.

However, Mr Talagi has said Niue needs to move quickly to build more accommodation to attract more tourists and secure a second weekly flight from New Zealand.

Wellington is sending a special envoy - an independent tourism expert - to the island this month to assess the sector and find options for the funding.

Mr Key said China was welcome to increase its aid to Niue "but I imagine New Zealand will continue to be the primary provider of funds".

The Auditor-General had criticised the way aid in Niue was spent, he said, and New Zealand needed to ensure taxpayers' money was well spent.

The Niuean wrangle is one of Mr Key's first major tests in the field of foreign affairs, and one in which he must tread a fine line between trying not to look like a bully and ensuring aid is spent well.

After the exchange of blunt views in the morning, Mr Talagi and Mr Key took a more conciliatory tone later in the afternoon after further meetings. Mr Key agreed the standoff had gone on too long and hoped for some action on the funds following the evaluation by the independent tourism expert.

Mr Talagi also pulled back from his statements he would turn to China if the funding wasn't forthcoming, saying he did not intend to take such a step immediately.

Mr Key this week announced significant increases in aid to Samoa and Tonga, but rejected Mr Talagi's request to consider further funding for Niue.

He said Niue was already highly funded - it got $21 million in aid last year. He was confident the money Niue was seeking would be released in due course.

The $4 million package is left over from the $20 million Halavaka Fund, set up in 2004 to rebuild the island after Cyclone Heta.

Much was used on infrastructure, such as a new hospital and government administration building.