"You know what, I will say quite honestly, that is a representation for a group of people about their religion and you having a go at the burqa is like having a go at a Christian for wearing a cross," Bailey said.
Ms Hanson laughed off the comparison. "The burqa is not a religious requirement ... countries around the world are now wanting to get rid of the burqa, we're talking about the full face covering," Ms Hanson said.
She told Bailey that she "couldn't believe a woman ... believes a woman should be covered up from head to toe".
Bailey fired back: "I can't believe a woman wants to have a crack at another woman about what she wears," the host said.
Ms Hanson demanded: "Don't pull the woman stuff on me.
"Just because I'm a woman and I'm complaining and I do not like it ... don't try and shut me down because I'm having a go at a woman. I'll have a crack at anybody."
Ms Hanson told Bailey "you don't understand the Islamic religion. What are we doing, taking women back 2000 years?"
Bailey said: "No one is forcing ... in this country you are not forced to wear the burqa."
The confrontation follows a racist incident at Sydney's Macquarie University in which a woman attacked a young Muslim couple because the female was wearing a niqab.
The woman was caught on camera yelling into the vehicle and yelling "Muslim terrorist", "F*** you", and "Take it off".
Ramzy Alamudi posted the shocking video on Facebook, saying he was shocked by what happened about 1pm last Friday at Macquarie University, where his wife attends.
"As we entered the car, my wife (who wears an Islamic veil - niqab) decides to smile politely and wave innocently at the lady assuming everything was good ... This is where the entire situation just turned upside down," Mr Alamudi wrote.
"The lady flips it and sticks her middle finger right at us! Me, being completely dumbfounded 'Ah, is everything OK?!'. At this point, she blows up in a rage ... starts pointing at my wife and screaming 'F**k you! Take it off!!' (referring to my wife's veil).
"She then runs towards our car and I urge my wife to lock her door and start recording if anything happens.
"The video will tell you the rest of the story ... she pounds on my window and continues to hurl racial and discriminatory slurs at my wife. 'Take it off! You Muslim terrorist! Who the f**k are you?'."
The woman in the video has since been charged.