Far-right independent senator Fraser Anning - who demanded "a final solution" to immigration in his maiden speech to the Senate last year - attended the St Kilda rally and said it was the "start of something bigger".
Senator Anning, who now sits as an independent after being booted from the Katter Australia Party following his defection from Pauline Hanson's One Nation, uploaded several videos to his Facebook page from the rally.
In the videos, Senator Anning stands with Cottrell, poses for photos and makes inflammatory remarks about migration.
Senator Hanson-Young urged the government to reject his vote.
"The government should refuse to take Fraser Anning’s vote in the Senate after he has shown again he is unfit to be in the Parliament. Hanging out and supporting neo-nazis who are inciting violence is inexcusable," she wrote in a message on Twitter.
Prime Minister Scott Morrison said Saturday's rallies at Melbourne's St Kilda's beach were "ugly racial protests".
Independent senator Derryn Hinch condemned Fraser Anning's support of Neil Erikson, who has been convicted of inciting contempt of Muslims.
"I have chastised Fraser Anning in the Senate for his racism, anti-abortion clinic exclusion zones and Hitler’s Final Solution. His appearance in support of the neo-nazis in St. Kilda today topped his calumny," he wrote in a message posted on Twitter.
Former independent MP Tony Windsor said he was shocked to learn of Mr Anning's support of the rally.
"As someone who grew up in the 50s & read about the Nazi treatment of Jews I never thought I would see an Aus politician supporting Nazis," he wrote on Twitter.
Labor MP Tim Watts said Fraser Anning's support for the protest is unacceptable.
"Today, around 100 neo-Nazis, white nationalists and racial supremacists rallied in St Kilda accompanied by an Australian Senator," he wrote on Facebook on Saturday evening.
"We should take these racists and fascists seriously. They hate the diverse, inclusive country that Australia has become and the values that the overwhelming majority of us share.
"In response, we need our community to send a clear message that racists like this will not be tolerated anywhere in our country."
'Showing respect for each other'
The inner city suburb of St Kilda, and nearby Caulfield, have sizeable Jewish populations. That community was targeted earlier on Saturday when Emmy Monash Aged Care Home for Jewish people, including Holocaust survivors, had swastikas painted on it.
Mr Morrison thanked the hundreds of police officers who took to the air, sea and land to control Saturday's event, while calling Australia the most successful migrant country in the world.
"This has been achieved by showing respect for each other, our laws and values and maintaining sensible immigration policies. Let's keep it that way, it makes Australia stronger," the prime minister tweeted on Sunday morning.
Mr Morrison, whose conservative Liberal-National coalition is struggling to hang on to power in a minority government, last year pledged to slash Australia's permanent migration intake to address congestion in big cities.
Australia's Race Discrimination Commissioner Chin Tan said the calls by rally organisers for a race riot like the 2005 Cronulla Riots in Sydney deserve criticism.
"I condemn in the strongest possible terms the apparent racist and race-based motivation behind the rally. There is no place for such rallies in Australia," he said in a statement.
"Activities that target a community based on their race or ethnicity are unacceptable and have no place in a cohesive, multicultural Australia."
The national group representing ethnic councils, FECCA, also condemned the protests.
"Our national character isn't represented by extremists in who seek to use racism to divide communities," the group said in a statement posted on Twitter.
Executive Director of the Australian Multicultural Foundation, Dr Hass Dellal, said inciting violence harmed all Australians.
"Yesterday's race based rallies is another demonstration as we lead up to Australia Day that discrimination based on race, ethnicity and colour will not be accepted by the majority of Australians.
"We all value our freedom of speech but also understand with that freedom comes moral limits which act to unite us in humanity.
"Discriminating to incite violence crosses those boundaries of freedom of speech and shows a lack of respect for humanity and fellow Australians of all backgrounds."
Meanwhile, the attendance of Queensland senator Fraser Anning at the protest organised by ultra-nationalist Neil Erikson has been condemned by MPs.
Queensland Senator Fraser Anning, who used the Nazi-associated phrase "final solution" in his maiden speech, stood with right-wing extremist Cottrell at the rally.
After speeches from both sides, the opposing groups dispersed onto nearby streets and to the front of Luna Park, with minor scuffles breaking out.
At least one person was pepper-sprayed. Three people were arrested.
- with AAP, AFP