Prime Minister Scott Morrison has ordered Pauline Hanson's One Nation to be put below Labor on Liberal how-to-vote cards.
The One Nation leader has shot back describing him as a "fool" and predicting it would lead to a Shorten Labor government.
The minor party has been rocked by revelations Senator Hanson questioned whether the Port Arthur massacre was a government conspiracy during an undercover investigation by Qatari TV network Al Jazeera.
Mr Morrison said the issue prompted him to contact the Liberals' organisational wing to ask them to preference One Nation below the ALP at the May election.
"My recommendation to them, which they're accepting, is that One Nation will be put below the Labor Party at the next election by the Liberal Party," Mr Morrison told reporters in Perth on Thursday.
He said the decision was based on the government's strong view about the sanctity of Australia's gun laws, introduced by John Howard after the Port Arthur shootings in 1996.
"The comments, particularly last night, and the linkages to Port Arthur, I'm sure all Australians would be shocked about. I was shocked by them," the prime minister said.
Hidden camera footage also showed Senator Hanson's chief of staff James Ashby and One Nation Queensland leader Steve Dickson talking about getting $20 million in donations from the US gun lobby.
Mr Morrison said he was disappointed with the response of the One Nation officials, who claimed they were drunk when they made the comments and set up by a Middle Eastern spy.
Senator Hanson used a 17-minute televised statement to blast the prime minister's decision, as well as defend her advisers over the Al Jazeera story.
"Prime minister, you have just handed the keys to The Lodge to Bill Shorten, (Greens leader Richard) Di Natale and the (construction union) CFMEU. You're a fool," she told reporters in Brisbane, reading from a statement.
Labor has committed to putting One Nation last on its how-to-vote cards, with leader Bill Shorten calling for the Liberals to do the same.
Mr Shorten said he was concerned the LNP in Queensland and the Nationals had been given a "leave pass" by Mr Morrison to do preference deals with One Nation.
"This is sneaky. He can't bring himself to put One Nation last because he wants their preferences if he can get away with it," Mr Shorten told AAP on Thursday.
"You can't pretend to stand up for middle Australia while your government colleagues are swapping preferences with conspiracy theorists and con men."
Some conservative government MPs believe the Greens should be below One Nation, arguing their economic policies are more dangerous than Senator Hanson's anti-immigration stance.
Mr Morrison said the Nationals would make their own decision.
He also refused to weigh into where the Greens should be preferenced.
"There's a lot of parties who have a lot of extreme positions and I'm not going to equate the Greens with one of the mainstream parties in this country," he said.
