Earlier this afternoon Prime Minister Bill English told reporters, on the way to Parliament, that Mr Barclay told him he had secretly recorded a staff member.
In a police statement, Mr English said Mr Barclay told him he had the recording, something the MP had been denying.
"Someone is lying - it's either him or Bill English".
The latest development in the more than two-year saga came after text messages from the then deputy prime minister to electorate chairman Stuart Davie talking about Mr Barclay leaving a dictaphone running in his office were released by Newsroom.
"If the National Party set standards the public of New Zealand expects from MPs, Mr Barclay would have been shown the door and sacked and the Prime Minister would be held accountable over this appalling episode". Whether he feels able to continue now that he's in a position where his word appears to directly contradict his Prime Minister's - that'll be a judgement call for him but I also suspect for his party.
English released his statement after an investigation by the Newsroom website revealed English sent texts about the allegations.
Assistant Commissioner Richard Chambers said there hadn't been enough evidence to obtain search warrants during the investigation which was now closed because there was "insufficient evidence to prosecute".
Newstalk ZB Political Editor Barry Soper said it has always been claimed the recording was on a dictaphone, but he now understands it was made after the surreptitious planting of CCTV cameras in the MP's Gore office.
"I've seen the allegations and I totally refute them", he said.
Opposition leader Andrew Little said that English's previous comments about the case were dismissive, and that he seemed to be covering things up to protect Barclay.
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The Prime Minister initially refused yesterday to discuss what he told police.
Mr English is defending that as money available to Parliamentary Service, as Ms Dickson's employer, to settle an employment matter.
A former local body politician, who did not want to be named, wanted Mr Barclay to resign. "The settlement was larger than normal because of the privacy breach".
English has declined to say how much Dickson was paid.
Mr English's admission was quickly followed by Mr Barclay fronting the media to read from a brief statement.
"Their current MP got out of a sticky situation thanks to hush money coming from the Prime Minister's budget, all sorted by the former MP for the electorate, none other than the Prime Minister Bill English".
It is illegal for anybody to intentionally record private communications which they are not a part of. English was asked by reporters why he hadn't censured the lawmaker. "The police conducted an investigation", English said.
"I think it is better for me to say nothing at this stage and let the process take its course".
Mr Davie was seeking details from Mr English about what exactly had happened.
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