The 37-year-old man, described as an extremist and partially undressed, forced his way into an Iftar dinner gathering at a community hall the Ballarat suburb of Alfredton in Victoria on Sunday.
Iftar is observed by Muslims at sunset in Ramadan, a holy month of fasting in Islam.
After allegedly threatening children outside the venue, the man directed hateful and racist language towards those inside and shouted slogans against Allah.
Police were called and discovered the man being detained.
"A 37-year-old man was interviewed by police at the scene and then given a direction to move on," Victoria Police said in a statement.
"The investigation into the incident is ongoing."
A petition addressed to local federal MP Catherine King, Ballarat Mayor Tracey Hargreaves and the regional city's police demanded a thorough investigation and appropriate legal action, including charging the gatecrasher.
It has attracted more than 1000 signatories as of Wednesday morning.
"Behaviour involving threats, intimidation, and racist abuse - particularly in the presence of children - must not be tolerated," the petition read.
It comes after Victoria Police copped flak for their handling of an alleged assault of a woman walking along the Goldfields Track from Bendigo to Ballarat in late December, declaring no offence was detected after a "thorough investigation".
Home Affairs Minister Tony Burke will discuss the incident in a meeting with Australian Federal Police commissioner Krissy Barrett on Wednesday
"People that go in to shout abuse at people, intimidate people and use dehumanising language against people for observing their faith - don't pretend you're patriotic," he told reporters in Canberra.
"That's the opposite of who we are as Australians.
"A whole lot of this, as I understand, is videoed, and the fact that there wasn't an immediate arrest doesn't mean that police won't be looking at this very closely."
Ms King described the incident as incredibly distressing and a "violent and racist attack".
"Every Australian Muslim has the right to feel safe, just like every other Australian has a right to be safe and feel safe," she wrote on social media.
"At a community Iftar, at home, and in the community.
"Leaders and elected officials who care about social cohesion have a responsibility to tone down their rhetoric and call out behaviour like this. We must all do our bit to turn the temperature down."
In a statement, City of Ballarat council said it was deeply saddened and strongly condemned racial discrimination and intimidation.
One Nation leader Pauline Hanson was censured by the Senate earlier in March for claiming in an interview there were "no good Muslims".
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