Tuhoe were outraged about Monday's announcement and Mr Flavell questioned whether Mr Key appreciated how significant it was, considering how close a settlement appeared to be.
He said many officials and some of Mr Key's own colleagues already appeared to have accepted an agreement had been reached with Tuhoe.
This week's developments had ramifications for others seeking settlements, Mr Flavell told NZPA.
"If you're other iwi in settlements now, knowing full well that your settlement is heading to the Cabinet table then I would be worried, because you would certainly be thinking about whether the prime minister thought you were getting too much and pulled the plug against the advice of officials and ministerial colleagues."
Chief Tuhoe negotiator Tamati Kruger said he wasn't insulted by the dinner comment, but in light of where the Tuhoe people were with the prime minister "it gives me the sense that whatever we say or do he will never, ever take it seriously.
"He is affirming a rigidness which is not really in the spirit of good faith negotiations. He is really going to force Tuhoe into a position that makes us look like the bad guys - like we are walking out of negotiations..."
Mr Kruger told NZPA Tuhoe and the Crown had often been at odds since right back to the 1800s and there were not many times when peace prevailed.
"This is just one of those moments that I've felt on both sides there has been sincerity and openness when dealing with Crown negotiators." That situation appeared to have been "bombed" by Mr Key's announcement, he said.
On Radio Live talk-back today, Mr Key still appeared to be joking around over the dinner comment, but said he apologised if anyone was offended.
He told reporters this morning he was still hopeful of a successful conclusion to negotiations with Tuhoe, but "that may take some time".
A 2014 goal of settling all claims was aspirational but he was not prepared to meet that if it came at too high a cost.
Mr Flavell said Tuhoe had hui planned over the coming weeks and had some hard decisions to make, while Mr Kruger said he wasn't sure who Tuhoe were now negotiating with.
Labour MP Shane Jones said Mr Key had "gone back to Don Brash's territory".
"He can see that Winston Peters is starting to encroach in that territory and has gone back to ngati redneck."
- NZPA