Newcastle's Anglican bishop says the government's Religious Discrimination Bill "misuses religion to create a wedge between Australians" and should be scrapped.
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The Right Reverend Dr Peter Stuart told the Newcastle Herald that the bill was causing "genuine fear in parts of Australian society".
"I am worried that some political and religious leaders are ignoring this fear," he said.
"They are moving to implement legislation when the case for change has not been made.
"Religious Australians must come to terms with the fact that aspects of religious teachings have created systems which LGBTIQA+ people find oppressive and which fuel intolerance and hatred."
The bill seeks to prohibit discrimination on the basis of a person's religion.
The government has tried to mollify moderate Liberals concerned about aspects of the legislation by agreeing to amend the Sex Discrimination Act to make it unlawful for schools to expel a gay student on discriminatory grounds.
But the changes to the Act would not protect transgender students and do not protect against other forms of discrimination outside expulsion.
The Coalition party room endorsed the bill on Tuesday, but several Liberal MPs have confirmed or hinted they will cross the floor and vote against it.
Labor decided in a caucus meeting on Wednesday to support the bill but only if the contentious Sex Discrimination Act changes were amended to include protection for transgender students.
Several conservative Christian groups, including Christian Schools Australia, Australian Christian Lobby and Family Voice, have publicly opposed removing religious exemptions in the Act.
But Bishop Peter said some minority and women's groups were "telling us that the bill makes them feel less safe and less welcome".
"The current bill misuses religion to create a wedge between Australians which may set back the quality of society that has been achieved by progressive and open approaches to diversity which are fostered through programs of goodwill and learning," he said.
"We have successful anti-discrimination legislation in this country which has ensured that citizens are treated with dignity and they have opportunity to exercise their gifts to build strong communities.
"The proposed bill undermines these decades-old protections and is seen as posing a risk to groups within our community."
He said the bill was "dividing rather than building Australian society".
The Australian Catholic Bishops Conference expressed support for the legislation after it was introduced to Parliament in November.
The church's Maitland-Newcastle diocese said its position was consistent with the ACBC's but declined to comment further.
The bill is being debated in the lower house on Wednesday, but a vote is not expected until Thursday.