The concession means that evidence gathered by hidden cameras in 47 pending trials - involving 229 suspects - will remain illegally obtained.
Such evidence can still be admitted under the Evidence Act, which enables a judge to allow improperly obtained evidence after weighing up factors such as the seriousness of the charge and the intrusiveness of the cameras.
Mr Key said it is was likely some evidence will now be ruled out.
"It's quite possible that trials will fail as a result of that and there's nothing the Government can do about that.
"There will be some cases, in my view, that fail as a result of our inability to reach agreement with other political parties."
He said the Labour caucus was fractured over the retrospective nature of the bill.
"Quite a number of their senior leadership have wanted to support the bill on a retrospective basis but they've failed to get the numbers from some of their more junior members."
Labour leader Phil Goff said that was "nonsense".
"As far as I know, he's not a member of our caucus."
Labour's justice spokesman Charles Chauvel conceded there was no some doubt cast over that evidence, and making the bill retrospective would have removed some of that doubt - for the price of a blank cheque for police powers.
"You can always remove risk if you're willing to pay the price they were willing to pay.
"The evidence before the select committee, though, was that paying that price wasn't necessary.
"I don't think any greater risk to the public exists now as a result of this legislation than existed before."
Once the bill is passed, police will apply for new search warrants and switch on hidden cameras in 13 operations that have been idle for over a month.
They were turned off after a Supreme Court decision on September 2 that ruled that all covert video surveillance on private property was illegal.
The bill will also ensure that previous convictions cannot be challenged on the basis of the Supreme Court ruling, closing the door on a potential slew of appeals.
It will be in effect for only six months, rather than the proposed 12 months, sending a clear message to the next Parliament that it must make the Search and Surveillance Bill a priority.
The bill has been tweaked to explicitly state that all video surveillance - including "over the fence" surveillance - is subject to the Bill of Rights Act protections.
The Government has accepted the recommendations.