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Under the sanctions, all Israeli officials wishing to enter New Zealand are now required to acquire entry visas prior to arrival.
Clark also announced that New Zealand was unwilling to receive President Moshe Katsav during a visit that he planned to carry out in Australia and New Zealand in August.
New Zealand Foreign Minister Phil Goff on Friday laid out his country's requirements for improved relations with Israel, including an admission of responsibility and a governmental assurance that such an incident will not be repeated.
Goff told Haaretz on Friday that if Israel wants to restore ties, it must apologize for the passport affair, admit responsibility, provide an explanation and offer an assurance that it would not commit a similar act in the future.
Clark said Israel's offer of an informal apology for the passport affair was not sufficient.
"The ball is in Israel's court as to where it wants to move from here," Clark said on National Radio. "Three months ago we asked for an apology and an explanation. That has not been forthcoming."
The visits of senior delegations to and from New Zealand have also been canceled, and the credentials of the new Israeli ambassador will not be approved, while contacts with the local honorary consuls of Israel in New Zealand will be severely limited.
At the end of a trial in Auckland Thursday, in which Elisha Cara, 50, and Uriel Kelman, 31, were found guilty of seeking to obtain a New Zealand passport through illegal means, and of belonging to a criminal organization, the two were sentenced to six months' imprisonment and fined 50,000 New Zealand dollars.
After the court passed its verdict, Clark announced that they operated "on behalf of the intelligence services of Israel."
Goff said Thursday, "We know this, the government of Israel knows this and it knows why we know," that they are agents of the Mossad.
He suggested in an interview with Israel Radio that the arrest of the two Israelis was not an isolated incident and hinted at claims made to Haaretz by New Zealand police that the Mossad had allegedly sought to acquire as many authentic passports as possible in a long-term operation.
The New Zealand sources pointed to the fact that Cara, who claims to be a tourist agent based in Australia, entered New Zealand 24 times during the past three and a half years.
The Australian daily, The Age, reported that Canberra had also initiated an operation to uncover whether its sovereignty had also been compromised by alleged Israeli agents.
For its part, the government of Israel is refusing to treat this as a matter involving its intelligence service and has initiated efforts to curtail the damage this affair has caused its foreign relations in general, and New Zealand in particular.
In a short announcement issued by the Foreign Ministry, Foreign Minister Silvan Shalom expressed "regret" at the decision of the New Zealand government to impose sanctions and said "Israel will do everything to restore the relations to normalcy."
The sanctions announced by the government of New Zealand Thursday had been decided in March, soon after the two men were arrested. The government of New Zealand refrained from making the sanctions public to avoid interference with the trial of the two suspects.
The sharp deterioration in the attitude of the New Zealand government stemmed from the failure of the government of Israel to respond to its request for an official explanation and an apology, three months ago.
Foreign Ministry sources said that the policy of ambiguity regarding the affair was imposed on them by the Prime Minister's Office and the Mossad.
Diplomatic sources in New Zealand told Haaretz that the sanctions are purposely directed against the government of Israel and not the Israeli people.
The strongly-worded announcement of the government of New Zealand stated: "Israel is a country with which New Zealand has had friendly relations for a long time. The government of New Zealand relates to the activities of the Israeli intelligence agents not only as utterly unacceptable but also as a violation of the sovereignty of New Zealand and international law."
"The Israeli agents attempted to demean the integrity of the New Zealand passport system and could have created considerable difficulties for New Zealanders presenting their passports overseas in future," Clark said.
The two Israelis were arrested four months ago, when a New Zealand Interior Ministry official became suspicious after speaking with a man with a Canadian accent. The man requested that the issuance of the passport be expedited, but when the official called the person to whose name the passport was to be issued, he learned that the individual in question was seriously handicapped and required constant care.
Jewish graves vandalized in Wellington
Swastikas and Nazi slogans were gouged around Jewish graves in New Zealand the day after it imposed diplomatic sanctions on Israel over the two alleged Mossad spies.
Sixteen graves were attacked overnight in the Jewish part of a cemetery in Wellington that dates to the 1880s, a city council spokesman said.
"Someone's used some sort of stick or tool to gouge swastikas into the grass around the graves. Words like `Sieg Heil' have been scratched into the footpath," he said.
Wellington Botanic Gardens manager David Sole said the Jewish section of Bolton St. cemetery near the center of the New Zealand capital was a sea of broken marble and overturned tombstones when he visited Friday morning.
"People are speculating the attack may have been sparked by the two Israeli men and the passport case," a council spokesman said, speaking on usual condition of anonymity.
The head of the New Zealand Jewish Council said there was a direct link.
"I think there is a direct connection between the very strong expressions against Israel and people here feeling they can take it out on Jews," David Zwartz told New Zealand's National Radio. "It seems to me Israel-bashing one day, Jew-bashing the next day."
Rabbi Antony Lipman said the desecration on the graves, some of them 100 years old, had shocked New Zealand's Jewish community.
"We hope Wellington is not going the way of some other communities in the world, where this has unfortunately become a frequent occurrence," he said.n