Hasty changes to hate speech laws protect only some Australians, Muslim groups say, and were enacted in reliance on an elaborate hoax, falsely believed to be an anti-Semitic terror plot.
However NSW Premier Chris Minns says he won't be repealing the changes.
The amendments, rushed through state parliament last month, followed the discovery of an explosives-laden caravan on Sydney's semi-rural outskirts on January 19.
The sinister find sent shockwaves through the nation, prompting Prime Minister Anthony Albanese and other leaders to declare the incident an act of terrorism.
But police confirmed the caravan, found without a detonator, was "almost immediately" dismissed by investigators as a ruse carried out by organised criminals to further their own agendas.
The disclosure has prompted a political war of words with Opposition Leader Peter Dutton calling on the prime minister to explain why he didn't go public with the hoax information to allay people's concerns sooner.
Home Affairs Minister Tony Burke said the incident was being used to pit Australians against each other.
"That these highly publicised examples of anti-Semitism have turned out to be organised crime for a completely different motive does not change the fact that bigotry is unacceptable," he told ABC Radio.
The much-publicised incident also prompted Australia's two most populous states to move to strengthen racial vilification laws with NSW passing laws to criminalise intentionally and publicly inciting hatred towards another person, or group, based on race.
Prominent Muslim groups say the changes "provide protection only to some Australians based on race" and accused Mr Minns of rushing to link the incident to terrorism while failing to disclose full details when he was aware "at an early stage".
"Those laws were hurriedly passed in reliance on, in part, an explosive-laden caravan," the Alliance of Australians for Muslims and The Australian National Imams Council said in a statement.
Further, the premier's response to the incident caused alarm and panic within the community, increasing Islamophobia and leaving many feeling vulnerable and unsafe, the groups alleged.
"(It) also left the Australian Muslim community exposed to suggestions that an Australian Arab or Australian Muslim may have been involved."
The premier's office said it would not be correct to suggest the government used the caravan incident in arguing for the latest racial hatred bill.
Mr Minns said he would not be repealing the new laws.
"While these laws were drafted in response to horrifying anti-Semitism, we have always made clear they would apply to anyone, preying on any person, at any time," he said.
