Senator Payman holds Afghan citizenship and has previously made representations to renounce it, but hasn't gone any further due to the Taliban's takeover.
Labor sided with the One Nation leader on Wednesday to allow documents to be tabled in the upper house questioning Senator Payman's eligibility to sit because of her dual-citizenship.
"You're not just vindictive, mean, nasty," she told Senator Hanson.
"You bring disgrace to the human race.
"I kept on giving you the benefit of the doubt, Senator Hanson, despite your repetitive attempts to be racist to anyone who does not look like you."
Lidia Thorpe tore up and threw Pauline Hanson's documents before leaving the chamber. (Mick Tsikas/AAP PHOTOS)
As Labor senators took their places to back the motion, independent senator Lidia Thorpe could be heard shouting as she tore up the documents and threw them at Senator Hanson.
Senator Thorpe gave the middle finger over her shoulder as she left the chamber.
Senator Hanson's bid to refer Senator Payman to a parliamentary committee was voted down by Labor and the Greens later that afternoon.
At the start of Question Time, Senate President Sue Lines condemned the "unparliamentary" and "disrespectful" conduct that had taken place, referencing the clash earlier.
"I cannot fathom any circumstances in which that kind of conduct in this Senate chamber is acceptable," she said.
"It is up to each and every senator in this case to find ways to take the heat out of the chamber.
"I have advised the parliamentary workplace support service of the incident."
The president said "given the gravity of this matter" she wouldn't deal with it immediately and would consult with the leaders of the government and opposition to consider how it should be managed.
Senator Payman was absent from Question Time, and Senator Hanson left the chamber when Senator Thorpe walked in.
Independent Senator Fatima Payman has labelled Senator Pauline Hanson vindictive, mean and nasty. (Mick Tsikas/AAP PHOTOS)
Earlier, Senator Hanson accused the Greens of forming a "protection racket" for Senator Payman.
"This should be referred to a committee to be investigated if she is eligible to stand in this place," she told the chamber.
"I will stand my ground on this issue."
In a letter to the president, Senator Hanson said Senator Payman's disclosure of her citizenship status didn't include supporting documents, such as correspondence with the Embassy of Afghanistan or confirmation of the steps she took to renounce her dual-citizenship.
