"I probably owe the boys 50 runs," Craig said. "And that catch could have gone to B-J on another day, but that's the rub of the green."
Craig eventually removed Smith caught and bowled for 71; Khawaja remained not out 57.
Adam Voges was unbeaten on seven after getting bowled by a Bracewell 'no-ball' in the last over. The delivery appeared legitimate.
"Once the arm is thrown out, there's not much you can do about it. Obviously we're disappointed," Craig said.
We were just hoping it didn't come up on the big screen too quickly," Hazlewood quipped in relation to Mitchell Marsh's catch of his boot toe in the final one-dayer.
New Zealand can take solace that they have been inserted in the previous two tests in Wellington and were dismissed for 221 (against Sri Lanka) and 192 (against India). They responded with declarations of 524-5 and 680-8 to win and draw those respective matches.
However, a loss in Wellington would only leave the chance of levelling the series in Christchurch.
A thatch of grass was left on the pitch by debutant test groundsman Hagen Faith to assist with seam movement. That compounded the New Zealand batsmen's difficulty in deciding when to leave outside off stump against sublime bowling.
The hosts struggled to muster momentum after going to lunch at 84-5.
Hazlewood's opening eight overs from the RA Vance End, returned three for 25; he finished with four for 42 from 14 overs. Peter Siddle backed him with figures of 12-5-37-3. Nathan Lyon's three for 32 helped mop the tail.
The tepid individual highlights for the New Zealanders included Mark Craig's 41 not out, Corey Anderson's 38 off 87 balls, and No 11 Trent Boult's three sixes in his 24.
Craig and Boult flayed 46 runs for the 10th wicket, the highest stand of the innings. Boult was eventually caught at long-on by Khawaja as he tangoed with the boundary rope.
Anderson took 17 balls to get off the mark but test matches tend to favour tortoises more than hares. He eked out a mini survival plan.
In the 12th over New Zealand's collapse reached its nadir, flailing at 51 for five. They had lost four wickets in 29 balls.
When captain Brendon McCullum went for a seven-ball duck, the only sound clearly heard was the hum of traffic circling the perimeter roundabout. The standing ovation which brought him to the crease, in his world record 100th consecutive test from debut, was replaced by eerie silence.