Sheikh Shady Alsuleiman was present yesterday at an exclusive function at the Australian leader's official Sydney residence Kirribilli House, alongside other leading Muslim figures.
In a sermon uploaded to YouTube in 2013 the sheikh, president of the Australian National Imams Council, said gay people were responsible for spreading diseases and attracted "evil outcomes to our society".
Turnbull, MP for the Sydney seat that hosts the annual Gay and Lesbian Mardi Gras parade, said he would not have invited him if he had known his views, emphasising the need for acceptance of diversity of sexuality and religion.
"I regard as unacceptable, and I will always condemn, any remarks which disrespect any part of our community, whether it is on the basis of their sexuality, their gender, their race, their religion."
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The faux pas came just days after Australia cancelled the visa of a British Muslim cleric who once preached that gays should be put to death, revelations that sparked an outcry in the wake of the Orlando gay nightclub killings.
Farrokh Sekaleshfar, who was in Sydney as the guest speaker of an Islamic centre, suggested in a 2013 lecture that death was a "compassionate" sentence for homosexuals.
"Let me be very clear about this, and this was the theme of my address at the iftar -- we are the most successful multicultural society in the world," he said.
"The bedrock of that, the foundation, is mutual respect and that is why I reach out to every community, every community in our country is part of our nation.