Wild scenes erupted as police wrangled crowds outside Parliament House, where a group of masked men dressed in black performed the Nazi salute, sparking a bitter war of words that escalated into shoving and bottles being thrown.
Members of a Campaign Against Racism and Fascism group chanted "refugees welcome, Nazis are not" as they faced off with a group holding a banner for the far-right National Socialist Network.
Police arrested a 30-year-old Doreen man for theft of a police body camera and assaulting police, while a 20-year-old Werribee man was arrested for discharging a missile and assaulting police.
Federal Labor MP Chris Bowen condemned the protests.
"It's unspeakably un-Australian," he said.
"It's unacceptable. It is not on."
A spokeswoman said police had been appalled at the acts displayed in Melbourne on Saturday.
"Everyone has the right to feel safe in our community regardless of who they are," she said.
"We understand incidents of anti-Semitism can leave communities feeling targeted, threatened and vulnerable.
"Hate and prejudice has no place in our society."
Victorian Opposition Leader John Pesutto slammed the protest and thanked the police for their work.
"The Victorian Liberals and Nationals condemn neo-Nazi thugs and their toxic bigotry and hate," Mr Pesutto wrote in a joint statement with deputy Liberal leader David Southwick.
"Australia has a proud history of an orderly immigration program where people from all backgrounds come together in shared liberal-democratic values."
The Liberal Party renewed its offer to work with the Andrews Labor government on plans to ban the Nazi salute, announced by the government following its use at an anti-transgender rally in March.
Earlier on Saturday, police declared the CBD a "designated area" from 7am to 7pm in response to the planned "stop immigration rally".
The designation empowered officers to search a person or their vehicle for weapons.
Greens deputy leader Mehreen Faruqi condemned the Nazi salute display.
"Disgraceful to see Neo-Nazis on the streets of Melbourne again, this time rallying against immigration," she tweeted.
"Fascism & racism have no place in our multicultural society & must be destroyed."
Most states and territories have enacted bans or are in the process of outlawing the display of Nazi symbols, with the salute covered in some jurisdictions.
Victoria has banned Nazi symbols in public and is moving to include the Nazi salute.
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