But Mr Key said countries such as Australia, Canada, and the UK have tougher legislation than in New Zealand.
Domestic terror threats were an "unfortunate reality" in the modern world, he said, and the Government must ensure that its intelligence agencies and police departments are well resourced.
Watch: Gunman dead in Sydney siege
Their capabilities must be under constant review, he said.
"Unfortunately, as we saw yesterday, there are some very sad and sick individuals in the world and they are susceptible to the kinds of messages that people like Isis are putting out there via social media - that is just the reality of the modern world we live in - they tap into people who are very disenfranchised for a variety of different reasons. They in themselves pose a domestic risk," Mr Key said.
"The good news about New Zealand is that I think that risk is much lower than many other countries but nevertheless it's a risk we can't ignore."
Hostages run to safety during a cafe siege in Sydney. Photo / AP
Intelligence agencies have identified 30 to 40 people as posing some form of risk to New Zealanders.
They were being monitored closely, he said, "for very good reason".
"As Prime Minister I can't just have intelligence agencies that feed me reports that tell me there are, from time to time, risks, and do nothing about it. If I was to do nothing about it, then rightly so, if there was a problem people would criticise me," Mr Key said.
"But whatever the level of legislation you pass, or surveillance you undertake or monitoring that you do, there's still always a risk. That's proven to be the case in Australia, Canada, the UK and the United States."
The events in Sydney yesterday had New Zealand joining the "great sorrow and sadness" of its "best mate" across the Tasman, Mr Key said.
While he didn't think it would mean a re-evaluation of sending troops to the Middle East to fight Isis under the Anzac badge, he said the world had to stand up to the terror group.
"In the end... there's only two ways the world can go - one is, to be scared of them and to allow them to gain more territory and control; or ultimately stand up to them," he said.
"Countries like New Zealand have a responsibility actually to stand up to a terrorist group that undertakes, not only brutal actions of its own, but encourages other people to do the same thing."
A hostage runs to armed tactical response police officers for safety. Photo / AP
Mr Key said he had no advice that suggested the Sydney siege would elevate the terror threat level in New Zealand.
Mr Key is also urging anyone with plans to travel to Australia this Christmas to continue with their plans despite the hostage tragedy in Sydney.
He also asked the Muslim community in New Zealand to take comfort from knowing that the vast majority of New Zealanders respected them as peace-loving and decent people and they were welcome here.
Mr Key told nzherald.co.nz that New Zealanders would be unnerved by the events at a cafe in Sydney in which two hostages and a gunman died.
"I think it's a combination of so close to home, so close to Christmas and just the mental picture of people going about their daily lives and doing absolutely nothing wrong - going off to get coffee and ending in this sort of tragedy."
"Our hearts go out mainly the victims but and their families but all of Australia who we treat as family," Mr Key said.
He acknowledged that some New Zealanders would be more afraid after last night's siege in which gunman Horan Monis claimed some allegiance with the terrorist group Isis.
Many New Zealanders would be going to Australia on holiday.
"My advice to them would be to continue to go to Australia. I don't think they should buy into the narrative that these terrorists are trying to peddle. On a relative basis, these risks are still very, very low. Nevertheless it is a growing risk and something we have to be vigilant of."
Asked if he had a message for Muslims in New Zealand he said: "They should take comfort from the knowledge that the vast, overwhelming bulk of New Zealanders will respect them for being peaceful, loving, law-abiding people."
"I think we all acknowledge that there is a very extreme element of the Muslim faith which is undertaking these actions but they are a tiny minority and the vast bulk of Muslims are good decent people and we welcome them in our society."
An injured hostage is taken to a waiting ambulance. Photo / AP
