The punishment for small-scale drug dealing should be softened while possession of drug utensils should be made legal, the Law Commission has recommended.

The commission this afternoon tabled in Parliament a major review of New Zealand's drug laws.

It says there is room for ''a more flexible approach to small-scale dealing and personal drug use,'' particularly when it is linked to addiction.

''For those whose drug use is associated with addiction or other mental health problems, the criminal law's response can in some circumstances exacerbate rather than reduce drug-related harms,'' the report says.

The commission was asked by the former Labour-led Government to carry out a review of the more than three-decades-old drug laws in 2007.

Nearly half the country's adult population has used cannabis it at some point in their lives and about one in seven, or the equivalent of 385,000 people, were classified as current users in 2006.

The commissions says drug laws were developed ''when the 'hippie' counterculture was at its height'' and the illegal drugs of choice were cannabis, cocaine, opiates and psychedelics like LSD.

''New Zealand's drug landscape is now vastly different from that which existed in 1975," the report says.

While there should be ''no dilution'' of prohibition laws, there should be a cautioning scheme which would see people warned rather than arrested for personal possession and use charges.

Police would issue a specified number of warnings to users depending on the drugs involved.

It questioned the effectiveness of criminal sanctions against drug users who caused no harm to anyone else or who suffered from mental illnesses and addiction.

The approach would offer offenders early access to drug treatment and was in line with the US and Australia.

"We recommend that a presumption against imprisonment should apply whenever the circumstances indicate that a drug offence was committed in a personal use context.

''We consider that the supply by drug users of small amounts of drugs with no significant element of commerciality ("social dealing") is entirely different from commercial dealing,'' the report says.

There should be a statutory presumption against imprisonment in any case of social dealing, the report recommends.

The report also recommends that it no longer be an offence to possess utensils for the purpose of using drugs.

''We are not aware of any evidence that existence of the offence itself deters drug use,'' the reports says.

There was a wide range of drugs that could be taken without the assistance of utensils, or with utensils that were widely and legally available making the offence virtually irrelevant in many cases.

Criminalising the possession of utensils also deterred safe drug use creating more harm.

The report also says the current approach to regulation of new drugs is ''fundamentally flawed'; and recommends a new regime.

Currently, new drugs entered the market and were used legally. The law responded after they had already caused harm.

''During this period, potentially harmful psychoactive substances are marketed and sold without restriction,'' the report says.

''The lack of adequate regulation creates an unacceptable level of risk for the public.''

Instead, there should be manufacturers and importers of a new substance to obtain an approval for a substance before releasing it onto the market.

The report will be considered by the Government, which is required to respond soon.