Prof Skegg was commenting in wide-ranging "review" remarks, in the university's recently released 2007 annual report.
The Otago University CoRE proposals had received "outstanding reports from international referees" and several aspects of the CoRE selection process had caused concern, Prof Skegg said.
He said the tertiary commission's move to again not select Otago as a CoRE host had come despite the university's "gratifying" achievements in research, including an 8.1% increase in its externally funded research funds (to $73 million last year).
For the third year in a row, Otago University researchers had been awarded the largest share of the prestigious Marsden Fund, which supported "blue skies" research.
Last year, Otago University had also gained more than half of the total available funding from the Health Research Council.
Otago had also achieved the country's highest ranking for university research quality when the tertiary commission had announced the results of its latest assessment, as part of the Performance-Based Research Fund, in May last year, he said.
Otago also had the highest ranked staff in more research subject areas than any other institution.
These included biomedical, clinical medicine, earth sciences, economics, education, English language and literature, history and classics, law, philosophy, public health, religious studies and theology, as well as sport and exercise science.
Research conducted at universities was "vital for the economic and social development of the nation".
But Prof Skegg said the whole CoRE exercise had "sent a disheartening message to New Zealand scientists in general".
There had been 26 new applications for CoREs, including 10 from Otago.
Yet the Government had agreed to fund only one new centre, while one of the existing CoREs was to be disestablished.
"Sadly, the CoRE process could be regarded as symbolic of the overall picture with regard to research funding in New Zealand.
"Our scientists and scholars spend enormous amounts of time in seeking support for their research, but their efforts are often frustrated by the abysmal level of investment in this country."
New Zealand's GDP per capita was relatively low, and the percentage of that GDP invested in research was also well below the OECD average.
A recent OECD report had concluded that New Zealand's total research and development (R and D ) intensity - the ratio of of gross spending on R and D to GDP - was 1.14%, about half the OECD average of 2.25%.
The level of research investment by the private sector was particularly low, and the Government had now made a welcome move to introduce tax credits for R and D.
"It is to be hoped that this scheme will lead to a genuine increase in the amount of research conducted, but the Government also needs to allocate much more money to bodies such as the Marsden Fund and the Health Research Council."
"Without this investment, New Zealand cannot expect to achieve the knowledge economy and the social progress that are vital for our future," he said.
