Guards at a top security prison are under investigation after a knife was found in the cell of the country's most notorious prisoner, Graeme Burton.

The homemade pocketknife was discovered hidden inside a fan in the double-murderer's cell at Auckland's Paremoremo Prison last month.

A source told the Herald on Sunday that guards had been failing to make daily cell searches and the blade was discovered when a prison guard searched it.

The source said: "The staff had actually been signing to say they had been doing their searches and completing their searches and everything and they had found a fan.

"But actually they hadn't - what had happened is the fan was taken apart and the knife came flying out.

"When they looked at the security footage the staff hadn't done any cell searches for days and days and days - they'd been signing they'd been doing it.

"They [prisoners] are really inventive. They make [knives] out of all sorts of things. They make them for self-defence and fighting."

Northern regional manager Prison Services Warren Cummins confirmed he had launched "an employment investigation".

"As a result of our initial review into the incident, we had concerns about the way his management plan was being administered.

"Affected staff received letters from prison manager Neil Beales advising them that the formal investigation was underway and why it was necessary."

Another prison source inside Paremoremo said Burton was a "menacing" presence who was monitored by four guards wherever he went.

"With Burton you have to worry," he said.

"You never let your guard down. You can have a reasonable conversation with him but he wants to go out in a blaze of glory so it doesn't matter the dealings you have that you think he may be personable. You still have to have your wits about you."

He said other guards and other inmates were terrified of Burton. "He just goes 'boo' and they fall over. The new officers are scared of him. He will respect certain people but respect in the sense you can never really trust him."

Guards have to constantly change their search routines.

Burton was charged internally with possession of a knife after consultation with police and may face loss of privileges.

Cummins added: "As a maximum security prisoner on directed segregation, prisoner Burton is managed under the strictest of conditions.

"Daily cell checks form part of his individual management plan. There is a requirement for staff to record when these checks are completed."

Burton could be placed in solitary confinement as a punishment.

Burton was convicted of attempted murder for stabbing fellow Paremoremo inmate Dwayne Marsh several times with a sharpened steel rod in December 2008.

He was already serving preventive detention with a minimum non-parole period of 26 years for the murder of Lower Hutt man Karl Kuchenbecker in January 2007 while on parole.

Burton, whose leg was amputated after being shot by police while on the run, received a $10,000 leg which was paid for by taxpayers.

Before Burton got his prosthetic leg, prison sources have said that other inmates would let the tyres down in his wheelchair to slow him down and prevent attacks.

Burton previously served 14 years for stabbing Paul Anderson to death outside a Wellington nightclub in 1992.

A judge described Burton, who has 113 previous convictions, as having an "unabated propensity for violence".