Mr Key said the report would "knock public confidence in the GCSB" which was why the Government had "a comprehensive response underway to address the organisational problems" identified in the report.
"The steps we are taking will be outlined in detail next week and are intended to begin the process of rebuilding public confidence in GCSB."
Mr Key said police had conducted as thorough check of all their systems and had advised that "no arrest prosecution or any other legal processes have occurred as a result of the information supplied to NZSIS by GCSB".
In her executive summary, Cabinet Secretary Ms Kitteridge said she had sought advice from the Solicitor General Mike Heron QC on instances where the GCSB had provided assistance to domestic spy agency the SIS, and the Police since before the GCSB Act was passed in 2003.
The Solicitor General had confirmed difficulties in interpreting the Act, "and the risk of an adverse outcome if a Court were to consider the basis of that assistance" in instances concerning 88 individuals.
Ms Kitteridge said a second report on those instances which occurred between April 1 2003 and September last year had been provided to Prime Minister John Key, who is the minister responsible for the bureau, "so that he can determine the appropriate action to be taken".
"I conclude, in relation to this and other legal issues, and to ensure that GCSB can carry out its work in the future with a clear understanding of the law, that legislative clarification would be desirable."
In her report Ms Kitteridge said most of the problems she and a team of Crown Law lawyers discovered involved the application of section 14 of the GCSB Act which forbids the bureau from intercepting communications of New Zealand citizens or permanent residents.
However, she noted bureau personnel did not believe section 14 applied when the GCSB had been asked to assist the SIS when that agency was working under a warrant.
The GCSB believed it was operating under the legal authority of those warrants.
Ms Kitteridge also noted the GCSB's understanding that it could legally provide "metadata" such as the information that appears on telephone bills to the SIS or Police because that data was not a "communication" as set out in section 14.
In October GCSB director Ian Fletcher sought an opinion from Mr Heron as to whether the GCSB's interpretation of the law with regards to SIS warrants was correct, but was told there was "a risk of an adverse outcome if a Court were to consider the question".
That view was subsequently backed up by Mr Neazor and the Commissioner of Security Warrants, a former High Court Judge who is required to sign off on SIS warrants.
The fact that the issue had not been identified since 2003 reinforced the point that interplay between the GCSB Act and the SIS Act "is not straightforward", Ms Kitteridge said.
The same legal reasoning applied to instances where the GCSB worked with the Police.
Meanwhile, a review of the legal issues around metadata found that it would be likely to constitute a "communication" for the purposes of section 14 of the GCSB Act.
The upshot was "that the lawfulness of some of GCSB's past assistance to domestic agencies is now called into question".
During the relevant period the bureau assisted the SIS 55 times potentially involving 85 New Zealand citizens. The instances where it helped the police involving three New Zealand citizens or permanent residents, had already been examined by Mr Neazor and determined to be legal, with the exception of the Dotcom affair.
However, Ms Kitteridge said that it was not known how many of the instances of GCSB assistance to the SIS would be confirmed as illegal.
Mr Fletcher said he accepted all of Ms Kitteridge's recommendations about improving the bureau's operating procedures and compliance with the GCSB Act.
"Within GCSB we are already following the report's recommendations as quickly as we can. Many of the issues are longstanding and there are some that will take longer than others to address appropriately.
"The structure of the GCSB has been reviewed and the functions of senior management are being addressed. We are increasing the legal and compliance teams, with a new chief legal adviser in place, and recruitment of other legal staff is in hand."
A new Associate Director to lead the internal change programme had been hired and would be announced soon.
Mr Fletcher said he would be reporting publicly each quarter on the bureau's progress in delivering the review's recommendations.
"You will be seeing and hearing more from us."
* Read the full report here.
