New Zealand's High Court on Wednesday overturned a decision to allow a Chinese company to buy a bankrupt dairy farm group, in a case which has sparked heated debate about foreign land ownership.

The court ordered the government to reconsider its approval for China's Shanghai Pengxin Group to purchase the 16-property Crafar Farms group, saying it had overstated the deal's economic benefits to New Zealand.

The proposal has met with fierce opposition in the farm-reliant country, with critics fearing an influx of foreign investors will snap up New Zealand's prime agricultural land.

New Zealand, the world's largest dairy exporter, has seen overseas interest in the sector increase amid rising demand from Asia.

Prime Minister John Key, who has previously expressed concern about New Zealanders becoming "tenants in their own land", has supported the sale, saying New Zealand cannot turn down investors simply because they are Chinese.

Key's Land Information Minister Maurice Williamson last month said critics of the deal were "bordering on racism", arguing that less than two percent of New Zealand farmland was owned by foreigners, mostly from Europe or America.

However, the main opposition Labour Party has called the planned sale "gutless, unpatriotic and unproductive".

Shanghai Pengxin has offered a reported NZ$210 million ($176 million) for the North Island farms, pledging significant investment in the properties, which have not been maintained since the original owners went into receivership in 2009.

But a New Zealand-based consortium -- which has a rival NZ$171.5 million bid -- challenged the deal, saying the law required any sale of farmland to foreigners to have a clear economic benefit to the country and it failed the test.

The court backed the rival consortium, the Crafar Farms Purchase Group, finding that any purchaser, whether from New Zealand or overseas, would have to invest heavily in the farms in order to improve them.

"That being so, the economic benefits caused by the overseas investment were materially overstated in the OIO (Overseas Investment Office) recommendation," it ruled.

Williamson said Wednesday that the OIO would consider the court's judgement and make a fresh recommendation on whether the sale should proceed "in a matter of days, not weeks".