Malcolm Turnbull has told the Human Rights Commission it needs to "very soberly and carefully" reflect on how it is handling race hate-speech cases.
The prime minister took the human rights watchdog to task over a case the Federal Court rejected that involved three Queensland university students.
The commission had "not done itself or its reputation or the respect for the law a service by bringing that case which ... most people found extraordinary".
"What it shows is that the Human Rights Commission must urgently review the way in which it manages these cases," Mr Turnbull told ABC radio on Monday.
"It should meet and it should very soberly and carefully reflect on whether in their conduct of the administration of the (Racial Discrimination) Act they have actually been undermining respect for it."
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Mr Turnbull all but confirmed parliament would examine Section 18C of the Act which makes it an offence to offend, insult, humiliate or intimidate another person or a group of people on the basis of their race, colour or ethnic origin.
Cabinet will consider the issue later on Monday, but the prime minister said parliament's human rights committee could examine the case to water down the laws which has been strongly pushed by conservatives within the coalition.
"It's very important that any change in this area has strong public support and consensus because we are dealing with matters of great sensitivity," Mr Turnbull said.
Liberal Democrat senator David Leyonhjelm is using the issue in negotiations with the government over legislation to restore the building industry watchdog
Asked whether he was holding the government to ransom, the senator told reporters in Canberra: "How could you possibly say I'm holding the government to ransom?
"All I'm doing is, (I've) got them by the balls and I'm squeezing".
The commission insisted it had no role in the Federal Court case, having terminated the matter in August 2015.
At no stage did the commission initiate or prosecute a complaint, it said in a statement.
"If the commission receives a complaint in writing alleging a discriminatory act, the Act provides it must investigate the facts and attempt to conciliate the matter."
Only 3 per cent of complaints finalised by the commission proceeded to court.
