“I am totally disappointed in the Indigenous affairs minister,” she said.
“That is someone who knows what it’s like for First Nations people in this country to fight to have equal rights.”
In an emotional address to the chamber, Yanyuwa woman Ms McCarthy criticised the government for not taking a strong stand against racism.
“You were willfully blind, willfully deaf and you come in now and you do not even have the graciousness to say 'I’m really sorry’,” she said.
It followed backpedalling from government, who blamed their support for Monday's motion on an 'administrative error'.
Prime Minister Scott Morrison said Tuesday morning the government's support for the motion was "regrettable", with Attorney-General Christian Porter saying his office was at fault.
"An early email advising an approach on the motion went out from my office on this matter without my knowledge," Mr Porter said in a statement.
"This one was not escalated to me because it was interpreted in my office as a motion opposing racism."
But before the motion was voted on, Greens leader Richard Di Natale mentioned the phrase's "long history in the white supremacist movement".
The motion was defeated 31-28 despite support from the government, including Indigenous Affairs Minister Nigel Scullion.
Finance Minister Mathias Cormann also took responsibility for what he described as a mistake.
"As a result of an administrative process failure, the government senators in the chamber ended up, on advice, voting in support of the motion," he said.
"As leader of the government in the senate, I take responsibility for that error and I'm sorry that that happened."