The extra counsel would be part of the commission and would have a specific focus on representing the interests of families who lost loved ones in the February 22 quake, he said.
Mr Key said the move was "a compromise to a certain degree".
"I think that we were always comfortable that the two existing counsel could provide that work, that legal advice, along with the liaison officers.
"In the final analysis, the families felt a little vulnerable, they have a high degree of anxiety. We obviously have great sympathy for their position, so as a gesture of goodwill we've decided to appoint another counsel."
Mr Key said assistance from the two existing counsel had worked well in most cases, but families yesterday raised two main areas of concern.
"The families felt very strongly they needed to fully understand what was happening in the royal commission's process, including an understanding of the legal and technical aspects of the inquiry and its reports," he said.
"These processes are complex and are not always easily accessible to non-lawyers, despite our best intentions, and specialist professional assistance may be required."
A number of families were also concerned they had not yet had the chance to present their evidence and have it recorded by counsel, Mr Key said.
"It is important that their evidence is recorded in a timely fashion and that counsel are available to assist with this."
Mr Key said it was appropriate that the additional counsel be part of the inquiry, given the large number of families involved and their different levels of engagement with the commission.
The counsel would work closely with a previously-appointed community liaison officer, to ensure families' concerns were addressed and questions answered.
The Government would talk with families about the process for appointing the extra counsel.
The cost of an extra lawyer could not be met within the commission's existing budget and the Government would provide the additional funding.
Mr Key said an initial "back-of-the-envelope" estimate of the cost was about $375,000.
Labour Party earthquake recovery spokesman Clayton Cosgrove said the move was a backflip and it remained to be seen if families would be satisfied.
"I have already spoken to a representative of the families, who has told me the initial response is one of disappointment," he said.
"It's not clear yet how far John Key is prepared to go in providing the sort of support the families have been asking for."
Mr Cosgrove said the details needed to be taken back to the families as a whole to see what they thought.
- NZPA
