Would I use avistado, or regular past tense?
Otras historias tradicionales dicen que Nueva Zelanda fue avistado por una larga nube blanca que colgaba sobre la tierra.
2 Answers
What's the original phrase in English?
Nueva Zelanda or Nueva Zelandia doesn't exactly mean that the name is feminine and it seems to be one of those countries that does not employ a definite article, however, if it is feminine in gender then it would be:
...Nueva Zelanda fue avistada por...
The past participle must agree in gender and number with the subject of the verb. In essence you are linking the subject and the past participle as if it were an adjective with the verb ser.
As to your question the por used with the passive voice (Ser+participio+por+agente) usually means by. In your sentence it seems to mean through or by as in "recognized by a large white cloud".[not an agent] If not incorrect, (the por agente is optional) it is definitely confusing.
I would suggest using como. New Zeland was seen from far off as a huge white cloud. Or maybe parecer with a change in wording.