The internet entrepreneur Kim Dotcom has exchanged caustic words with New Zealand's prime minister at a parliamentary committee hearing submissions on proposed changes to surveillance laws.

German-born Dotcom, who is being sought by the US to face charges of copyright infringement and money laundering, was the star attraction on the second day of hearings at the intelligence and security committee in Wellington, chaired by the prime minister, John Key.

Dotcom told the committee the proposed expansion of spying powers was "poorly timed considering the scandalous leaks concerning US mass surveillance of the world's population, including US allies". He urged New Zealand to repeat the "heroic stance" of the 80s when the country was declared nuclear-free.

"When a great power such as the United States is committing immoral and illegal practices, ranging from Guantánamo to torture to drone strikes, let alone mass surveillance against the entire world population, there has never been a greater need for New Zealanders to once again step forward and declare their values shall not be abandoned or suspended under pressure from the United States," he said.

Dotcom claimed he had evidence that Key, contrary to repeated public assurances, had been aware of his activities before a dramatic raid on the "Dotcom mansion" north of Auckland in January last year. "Oh, he knew about me before the raid. I know about that," said Dotcom, eyeballing Key. "You know I know."

Key replied: "I know you don't know. I know you don't know."

"Why are you turning red, prime minister?"

"I'm not. Why are you sweating?"

"It's hot. I have a scarf."

Key later told reporters that Dotcom was "a well-known conspiracy theorist … He's utterly wrong."

The bill to amend the remit of the Government Communications Services Bureau (GCSB) was prompted by the admission that surveillance of Dotcom and a Megaupload colleague had been illegal. Their status as permanent residents of New Zealand meant the agency was prohibited from spying on them. Key issued a public apology to the men over the incident.

John Key at the hearing. Photograph: Marty Melville/AFP/Getty Images

The new bill, which would make it lawful for the GCSB to spy on permanent residents on behalf of domestic agencies, has attracted wider interest following the revelations of the scope of surveillance undertaken by the US and its partners, as leaked by Edward Snowden to the Guardian.

The GCSB is a partner in the information-sharing Echelon or "five-eyes" group, led by America's National Security Agency and including Britain's GCHQ. Key says the Echelon arrangement has never been used to circumvent domestic law by spying on New Zealanders.

In an interview with the TV3 Campbell Live programme after the hearing, Dotcom grinned when asked whether he had been in touch with Snowden. "I do not know Edward Snowden personally, and that's all I want to say about this," he said.

The attempt to extradite Dotcom in relation to the activities of his Megaupload file-locker site has become mired in a succession of legal challenges, and is now unlikely to be heard any earlier than April 2014.