"We could see it go through the aisles, like it was very obvious. They said over the loudspeaker that they were going to clean it up etc, and then three hours into the flight they were like, 'I'm sorry we're going to have to turn around it's unsafe'.
"They cleaned it up but the smell couldn't really be hidden."
She said one crew member even joked it was a "sh***y situation".
Ms Malley said passengers were offered masks to put over their faces, but that did nothing to stop the stench throughout the cabin.
A Virgin Australia spokeswoman said passengers' claims were "completely untrue".
She said there was probably a "smell on board" from the water, as people had used it to wash their hands.
In a statement, the airline said the plane was diverted after two of the sinks on board were found to be leaking.
"In accordance with standard operating procedures, the captain made the decision to return to port as a precautionary measure after two of the sinks on board were leaking," the airline said.
"Virgin Australia flight VA2 from Los Angeles to Sydney landed safely in Los Angeles at 4.09am local time.
"All guests have been accommodated overnight in Los Angeles and Virgin Australia is working to get them to their destination as soon as possible.
"The safety of the aircraft was never in question."
The aircraft had now been inspected by engineers and cleared to return to service, the statement said.
Despite the airline's claims, Ms Malley was adamant she saw human waste.
"If it was water, why would they turn the plane around? We saw bits of toilet paper and cr**.
"Ask anyone else on the flight -- they would agree."
A written apology had been issued to all passengers on board the flight.
The letter said: "Unfortunately the aircraft did need to return to Los Angeles due to an issue with plumbing in the fresh water overflow system on board and could not continue with the journey.
"At no time was health or safety at risk to any persons on board the aircraft."
Passengers were offered credit to use towards future travel with Virgin.
- additional reporting Newstalk ZB