The Queensland senator-elect made the comments on ABC Television's Q&A panel program on Monday night, regarding her calls for a royal commission into Islam and ban on Muslim immigration.
"We are a Christian country and I don't believe that Islam is compatible with our culture and our way of life," Ms Hanson said.
"People in Australia are in fear because they can't walk in the streets. They're in fear of terrorism which is happening around the world. Why? Because of Islam."
More than 200 anti-Hanson protesters rallied outside the ABC's Ultimo studios while the show was under way.
Q&A audience member Khaled Elomar of Cronulla, said he explained Islamophobia to his son by showing the 11-year-old videos of Ms Hanson.
"You are creating a dysfunctional country by isolating a religion, 20 years ago isolating a race, and if you keep on going down this track I will fear for my wife's life, I will fear for my kid's life," Mr Elomar said.
Ms Hanson was asked by host Tony Jones if she could offer the young boy hope that she considered him an equal citizen, replying: "He is an equal citizen as long as he wants to give his loyalty to this country and is not torn by an ideology that has hatred towards the West or infidels."
Labor Senator Sam Dastyari said Ms Hanson was pedalling "hurtful, painful" policies which he took personally.
Ms Hanson said she didn't know Senator Dastyari was Muslim.
"You're a practising Muslim? This is quite interesting... I'm surprised. I didn't know that about you," she said.
Federal Education Minister Simon Birmingham flatly rejected One Nation's calls for both a royal commission into Islam or ban on Muslim immigration.
Newly promoted cabinet minister Matt Canavan said everyone elected to parliament deserved respect, including Ms Hanson.
But he disagreed with her views.
"We need to avoid the temptation to group people," he told ABC TV on Tuesday.
"We should judge people on the content of their character, not the colour of their skin."