New Zealand prime minister John Key has said that some of the evidence against the internet millionaire was gathered "without statutory authority", and ordered an inquiry into the conduct of the country's intelligence staff.
"I expect our intelligence agencies to operate always within the law. Their operations depend on public trust," said Key.
"I look forward to the inspector-general's inquiry getting to the heart of what took place and what can be done about it. Because this is also a matter for the High Court in its consideration of the Megaupload litigation, I am unable to comment further."
The US authorities shut down Megaupoad in January and is currently fighting to extradite Dotcom so he can stand trial. The prosecution has suffered a number of setbacks since Dotcom's initial arrest.
A New Zealand judge previously ruled that a search warrant executed during a raid on Dotcom's home was unlawful, and declared that the accused should be granted access to the evidence against him.
Posting on Twitter, Dotcom welcomed Key's call for an inquiry into the spying allegations.
"I welcome the inquiry by John Key into unlawful acts by the GCSB," he wrote. "Please extend the inquiry to cover the entire Crown Law Mega case."
The extradition trial will take place in March 2013 after being postponed from August this year.