Warren Gatland concedes his British and Irish Lions took a step backwards in their dramatic 23-22 loss to the Highlanders in Dunedin.

But he says their problems aren't terminal.

A powerhouse finish secured a famous win for the hosts after trailing by nine points entering the final quarter.

Reserve first five-eighth Marty Banks landed a wide penalty six minutes from time to clinch victory in their first match against an international team.

Missing nine first-choice players and outscored three tries to two, goalkicking proved decisive for the hosts, who slotted five from six shots.

The Lions landed three from six, with late penalty misses from Englishmen Owen Farrell and Elliot Daly highlighting a patchy performance.

The second Lions loss from four games was in contrast to their grinding 12-3 defeat of the Crusaders three days earlier.

That result came via a completely different starting XV, in a performance which they hoped had swung tour momentum their way.

"I thought we were good against the Crusaders and tonight we took a little bit of a step backwards in our game management and control," Gatland said.

"We were looking reasonably comfortable at 22-13 up and, unfortunately, some big moments we didn't nail and allowed them back into the game."

Not many of the tourists will have boosted their Test chances, with Gatland set to name a near-full strength side to face the Maori All Blacks in Rotorua on Saturday.

A multitude of errors, particularly fielding kicks, counted against them, along with a 12-7 penalty count dished out by Australian referee Angus Gardner.

Gatland was perplexed by several rulings but didn't want to dwell on them.

"The penalties really hurt us but we probably shot ourselves in the foot towards the end of the game and allowed them an opportunity to sneak it from us."

A marathon first passage of play set the tone of a fast-moving match, eventually resulting in a successful penalty shot from Highlanders first five-eighth Lima Sopoaga.

Lions opposite Dan Biggar matched that but winger Waisake Naholo, released from All Blacks duty, put his team 10-3 up.

Naholo's shoulder thundered into the head of English lock Courtney Lawes, who didn't return after leaving the field gingerly for concussion testing.

The Lions struck back quickly through their best-worked try of the tour, when speedy England centre Jamie Joseph was put into space.

Joseph and Welsh halfback Rhys Webb were standout performers in the Lions backline while Ireland lock Iain Henderson stood tall in a beaten pack.

The scores locked 10-10 at halftime, Scottish winger Tommy Seymour brought the second spell to life by pulling down a Sopoaga cross-kick and scampering 40m.

Sopoaga's second penalty was followed by a try to Lions skipper Sam Warburton, the flanker stretching out to give his team a healthy buffer.
The Highlanders bench players provided more impact than their counterparts as penalties started to flow their way.

Hooker Liam Coltman scored from a lineout drive before Banks held his nerve to slot the match-winner following a massive scrum shove from his pack.