Key Points:

Foreign Affairs Minister Murray McCully is refusing to comment on claims New Zealand and Australia are tapping the phones of key figures in Fiji's self-appointed government.

Attorney General Aiyaz Sayed-Khaiyum yesterday alleged Australian and New Zealand authorities were tapping phone lines and using locals employed at their high commissions to spy on the interim government, the Fiji Village website reported.

A spokesman for Mr McCully today refused to comment on the allegations.

Mr Sayed-Khaiyum said Fiji's interim prime minister, Commodore Voreqe Bainimarama had questioned the Australian Foreign Minister Steven Smith on the alleged tapping.

Mr Smith had neither confirmed nor denied the claim.

He also lashed out at locals employed at the High Commissions in Fiji alleging that they are acting as spies against their own country.

Mr Sayed-Khaiyum earlier denied a decision by his government not to expel New Zealand's acting high commissioner for now was a back down.

The diplomatic row is over a demand by Cdre Bainimarama that a visa be granted to the son of a senior official in Suva.

He told the Government last week acting High Commissioner Caroline McDonald would be expelled if the visa was not granted to George Nacewa so he could resume studies at Massey University.

Cdre Bainimarama was told last Tuesday the visa would not be granted, and since then the Government has been waiting for his reaction.

Mr Sayed-Khaiyum yesterday said the government had decided against expelling Ms McDonald for now.

The decision followed Prime Minister John Key yesterday warning New Zealand would retaliate if she was expelled.

But today Mr Sayed-Khaiyum denied Fiji had backed down.

He said some New Zealand diplomats were disengaged with Fiji's government but engaged with the opposition, which he did not see as good diplomatic behaviour.

But Cdre Bainimarama had chosen to separate out the actions of Ms McDonald from the government-to-government relations of New Zealand and Fiji.

"There is a New Zealand diplomat who is not acting or behaving diplomatically," he said on Radio New Zealand.

"That needs to be dealt with on a separate basis. It should not in any way affect our ability on a government-to-government basis to rebuild our relationship or better our relationship."

He said Ms McDonald could still be expelled at a later date if she was found to be meddling in Fiji's internal politics.

Mr Sayed-Khaiyum said a three-member team was being set up "to try and work with New Zealand to foster better relations".

Cdre Bainimarama has become increasingly irritated by the travel sanctions New Zealand imposed on Fiji after he led a coup two years ago that overthrew the elected government.

The travel ban applies to members of his government, the military, and their relatives.

George Nacewa is the son of Rupeni Nacewa, a secretary in the Fiji president's office.

The last contact between the two governments was late last week when Cdre Bainimarama sent an angry letter to Mr McCully.

The foreign minister responded by reiterating New Zealand's position.

- NZPA understands the Government would consider expelling Fiji's high commissioner in Wellington, Cama Tuiloma, if Ms McDonald was given her marching orders.

New Zealand's previous high commissioner in Suva, Mike Green, was expelled in June 2007 after being accused of interfering in Fiji's domestic affairs.

A spokesman for Mr McCully would not comment last night on the latest developments in the saga.