All Blacks officials have confirmed a bugging device has been found in the New Zealand squad's hotel meeting room in Sydney.
The device was planted inside a chair and found during a routine sweep of the room in the lead up to the opening Rugby Championship clash.
New Zealand Rugby said in a statement that police have been called in to investigate.
"A listening device was found in a meeting room this week during a routine security check," chief executive Steve Tew said.
"The hotel immediately launched an investigation, we have informed the Australian Rugby Union, and jointly we have now decided to hand over the investigation to the Australian police.
"We are taking this issue very seriously, and given it will be a police matter, it would not be prudent to go into further details."
New South Wales Police Superintendent Brad Hodder said: "At this point in time our forensic people are looking at that device. All I can say is it's an electronic device."
The device, described as similar to that used by law enforcement and spying agencies, was found on Monday, a day after the All Blacks arrived.
The foam of the seat appeared to have been deliberately and carefully cut to make way for the surveillance device and then sewn or glued back together to be almost undetectable, according to the New Zealand Herald.
Australian Rugby Union chief Bill Pulver told the New Zealand Herald there was no way his organisation had anything to do with the device.
"Of course [the ARU is not involved]. It is completely ludicrous. I just think it's a ludicrous concept that there are listening devices being placed in team rooms. I don't know how that could happen," Pulver was quoted as saying.
"I'm utterly disappointed the story would break on match day and frankly, that's all I've got to say. We are going to focus on a game of rugby and we will deal with this matter after the rugby."
The All Blacks were clearly not distracted by the furore over the device as they won the game 42-8.