Victoria Cross-winner Willie Apiata's ability to operate as a fully-functioning member of the NZSAS was affected because of the publicity around his award, the NZ Defence Force has said.
The claim was made when the Defence Force was challenged over the publicity around Apiata and why such broad anonymity and protection was needed for members of the NZ Special Air Service.
Paul Radich QC had told the Inquiry into Operation Burnham it had to reject the concept of NZSAS members appearing to give evidence, even if protected by screens.
Sir Terence Arnold, one of the inquiry chairmen, asked about Apiata. "That was a very public thing. He went back to Afghanistan."
Radich responded: "I understand, sir, his operational capabilities were then adversely affected."
The disclosure came during the second day of the Inquiry into Operation Burnham and saw push-back from the government establishment over the need to protect and restrict classified information.
Apiata was a corporal in the NZSAS who won the Victoria Cross for bravery under fire in 2004, while rescuing a wounded fellow trooper while under heavy fire. Apiata then rejoined the fight, which took place on an operation seeking out Taliban territory in Afghanistan.
The award saw NZDF engage in a huge publicity campaign, which included press conferences and a book on Apiata. He was then photographed in Afghanistan having taken place in operations after the Victoria Cross was awarded.
Radich said anonymity of the NZSAS members was critical because knowledge of identities could compromise their effectiveness.
The elite unit was a highly specialised force with a limited number of members which used specialised tactics, he said.
"The numbers are small. At any given time there are a small number of people on standby. But it is small."
He said disclosure of identities could reduce the number available and compromise the unit's contribution to New Zealand.
Radich said there was concern identification of NZSAS members could make them targets of "exploitation" and put families at risk.
Deputy solicitor general Aaron Martin said the highly sensitive nature of the evidence needed specific protection to keep it from being disclosed publicly.
The security of New Zealand and the benefit enjoyed from its international relationships was at risk, he said.
He said all classified material to be aired in the inquiry into a controversial NZSAS raid should be covered by a legal order suppressing airing or sharing.
While acknowledging the inquiry was using strict government security protocols, Martin said a legal order from the Inquiry would add greater protection, including from anyone seeking it later through the Official Information Act.
Martin was appearing for a range of government agencies, including the intelligence services.
The inquiry was sparked by the publication of the Hit & Run book, written by Nicky Hager and Jon Stephenson, who alleged "war crimes" and the deaths of six civilians and wounding of 15 others during an NZSAS raid in Afghanistan.
NZDF rejects the allegation, saying nine insurgents were killed in an operation which saw the NZSAS acting in line with its ethical and legal obligations.