Banister also confused the term " haram "(forbidden) with the holy Koran and suggested Jews worshipped Jesus Christ.
The interview, which aired early this week, went viral on social media.
' ' I don ' t oppose Islam as a country, umm, but I do feel that their laws should not be welcome here in Australia, ' ' Banister told Seven News reporter Erin Edwards.
She announced her withdrawal from the election on Saturday.
" With the way Channel Seven edited my interview, I was left quite the fool, " Banister said in a brief statement.
" I ' d like to apologize to One Nation, to my friends and family, for any embarrassment this has brought to them. "
One newspaper headline said Banister had managed to put Islam literally on the map.
The leader of One Nation, Jim Savage, said Banister continued to have the " full support " of the party executive.
He said she had been under " enormous pressure ", including threats to her and her family.
Commentators compared Banister to Sarah Palin, the gaffe - prone Republican vice - presidential candidate in the 2008 US election.
Even before this interview, Banister was regarded as a rank outsider to win her seat in Sydney.
The mother - of - two rose to prominence when she was arrested for going into a supermarket and putting stickers saying " halal food funds terrorism " on Nestle products.
She is facing charges of " contaminating or interfering with goods ". If convicted before polling day, she would have been barred from standing.