"These actions were wrong, plain and simple. They are unacceptable to me and unacceptable to this Government."
Woods was to contact Butler tonight for a "please explain" and accepted his resignation, saying the use of private security Thompson and Clark agency was unacceptable.
"New Zealanders need to be able to trust that covert surveillance is only ever used in the public interest, with appropriate safeguards and to the highest ethical standards."
The investigation results, released this morning, looked into government departments and their use of external security consultants.
Southern Response originally hired Thompson and Clark after "issue motivated groups" were seen as a security threat.
Greenpeace, the Mana Movement and some iwi groups from Northland, the East Coast and Taranaki were among the groups which concerned them.
On behalf of Southern Response, Thompson and Clark attended and recorded several closed meetings of insurance claimants.
Prime Minister Jacinda Ardern said the State Services Commission's inquiry into the use of private investigators by government agencies had revealed some disturbing and unethical behaviour.
"I think there should have been alarm bells ... Reading the report, it seems obvious to me that some of this behaviour was patently wrong," Ardern said today.
State Services Minister Chris Hipkins said the report findings were "pretty damning".
"There's been clear follow-up action to refer them to the relevant authorities where there may have been a breach of the law or the relevant professional body ... because they clearly haven't been adhering to the relevant professional standards," he said.
In his report, State Services Commissioner Peter Hughes called some behaviour "an affront to democracy". He has laid a complaint with police over the actions of Thompson and Clark.
Hughes detailed a list of breaches of the State Service Code of Conduct, including potentially illegal recordings of insurance claimants, public sector employees accessing the NZ Transport Agency database for Thompson and Clark (TCIL) and spying on the Green Party and iwi.
Separately, police released a report which found 16 officers over 15 years had given information to TCIL, and a further four had moonlighted for private investigation companies.
Hughes apologised to people whose privacy had been breached by state servants or their contractors.
He revealed he had laid a complaint with police over TCIL potentially unlawfully recording closed meetings of insurance claimants discussing legal action against Southern Response.
Hughes also found two former Ministry for Primary Industries workers engaged in secondary employment with TCIL had accessed the NZTA database on behalf of TCIL.
Hughes also looked at the Ministry of Business, Innovation and Employment and found its service "as a whole" breached the Code of Conduct by failing to maintain an appropriate level of objectivity and impartiality.
He was scathing in his criticism of agencies' actions against Kiwis exercising their democratic rights through TCIL reporting on the activities of groups such as Greenpeace, the Green Party, the Mana Movement and some Northland East Coast and Taranaki iwi groups, which he said were treated as a "security threat".
"This is an affront to democracy, and government agencies should have challenged TCIL's definition and treatment of issue-motivated groups.
"I am clear that it is never acceptable to classify a person or group of people as a security threat just because they lawfully exercise their democratic rights, or use that as justification for gathering information."
Hughes said he had issued new standards which agencies would need to comply with by April 30.
Thompson and Clark director Gavin Clark said it would consider all aspects of the report but he accepted the findings that some processes could have been more stringent.
An internal review is under way.
The police review found no evidence that police engaged, tasked or directed any external security consultants to undertake surveillance on behalf of police, and there was no evidence of criminal or corrupt behaviour by police staff.
