Key Points:

The Government is under increasing pressure to review its Treaty of Waitangi settlements process after a second damning finding by the Waitangi Tribunal over a proposed settlement - this one involving Te Arawa-affiliated tribes in the Rotorua area.

It follows a tribunal report last week recommending that negotiations with Ngati Whatua o Orakei be suspended until negotiations with other iwi in the Auckland regions had started.

Yesterday's report does not go that far but it says there have been "serious flaws in the way the Crown consulted with non-settling Te Arawa groups" and also urges engagement with non-settling iwi of the area.

The Te Arawa negotiations have been conducted by the Office of Treaty Settlements, a Government agency that can conclude settlements without going to the tribunal.

It is separate to the Te Arawa Lakes settlement which was passed into law last year.

The office is negotiating with an umbrella group of about 14 tribes known as Nga Kaihautu o Te Arawa but they represent just over half of the tribes in the Te Arawa confederation of 40,000 people.

An agreement in principle was signed in 2005 and the office has put aside $36 million for the settlement. A bill legislating for the settlement is due to be introduced to Parliament within a few months.

The issue has been plagued with mandating and cross-claim disputes.

The tribunal report says iwi representing the other half of the Te Arawa tribes have been pursuing alternative representation in their attempt to enter negotiations with the Crown, which had been refused.

Eight of the non-settling iwi in Te Arawa sought an urgent hearing of the tribunal over the process. The tribunal's report yesterday was released on the eve of court action today, in which the Federation of Maori Authorities is challenging the settlement.

The tribunal's finding yesterday is damning of the role of the settlement office, which it says "did not act honourably and with the utmost good faith".

"Te Arawa is now in a state of turmoil as a result. Hapu are in contest with other hapu and the preservation of tribal relations has been adversely affected."

The office was the interface between Maori and the Crown, charged with the responsibility of upholding the honour of the Crown.

"Now because of their practices, the claimants face real and serious prejudice."

The tribunal said that at this late stage it was not seeking to stop the settlement with Nga Kaihautu o Te Arawa. But it recommended specific changes to the settlement on specific sites and recommended the Crown engage with Te Arawa groups outside the settlement. It also wants an annual policy audit of the settlement office by the Minister of Maori Affairs. The tribunal has only powers to recommend.

Mindful that it has issued two critical reports within a week after urgent hearings, the tribunal said such hearings must not become a normal step on the way to settlement.

"The Crown must get its policies and practices better tuned to achieving fair and sustainable settlements."

Prime Minister Helen Clark said the issue needed scrutiny and noted that neither case had been through the tribunal process - "whether that is a factor in the approach that they are taking I don't know".

Treaty Negotiation Minister Mark Burton said the Government would consider the recommendations carefully but he would look at ways "in which the Crown can engage with non-affiliated Te Arawa groups" but would avoid delaying or destabilising the affiliate Te Arawa settlement.

Waiariki Maori Party MP Te Ururoa Flavell said the report showed "a level of failure and fatal flaws in the Treaty settlement process".

"The Crown's hastily stitched together deals are unravelling before our eyes. It's knitting is in shreds and no amount of spin will put it together again."

The Maori Party has long objected to the Crown being "the thief, the police, the jury and the judge" in the Treaty settlements process and wants a more independent process.