In front of a packed audience at St Laurence's Church in Church Stretton last night, Ludlow candidate Mr Dunne accused Mr Sahota, a Sikh, of "talking through his turban".
Mr Sahota said he was offended by the comment – more so as Mr Dunne did not immediately apologise – and is urging the Conservative Party to investigate.
The remark came after Mr Sahota answered a question on education budgets.
Mr Sahota said he heard gasps from the audience but was so shocked he did not immediately challenge Mr Dunne.
It was not until he was making his closing speech some 15 to 20 minutes later that Mr Sahota said he had been "offended" by the comment.
Mr Sahota said: "He jumped up and said, 'sorry', he apologised. But he didn't apologise straight away. He was on the microphone a couple of times after his remark and did not apologise.
"My turban is my faith, to offend my turban is to offend my faith.
"This was in a church, a house of God.
“I was shocked and deeply hurt that someone who was an MP for 14 years would make such a derogatory comment about the Sikh faith. This is extremely insulting to the Sikh community.
“These are the kind of offensive comments I remember receiving in the 1970s. They have no place in modern Britain and they certainly have no place in our Parliament.
“I hope the Conservatives will investigate this matter immediately.”
Mr Dunne has today apologised 'unreservedly' for his remark.
"I apologised to Kuldip Sahota for my comments last night," he said.
"I apologise again unreservedly for the offence caused.”
Tan Dhesi, who became the first turban-wearing Sikh MP in the 2017 General Election, has called for Mr Dunne to be expelled from his party.
He said: “This disgusting, racist remark wasn’t just made by a Conservative Parliamentary candidate.
"It was made by someone who was a Conservative MP for 14 years, who has served as a minister in several Conservative governments, and this year was even given an honour by the Conservative leadership.
“He is not a random candidate in an unwinnable seat. He is a senior Conservative figure who could be re-elected.
“This attack on the turban, which we consider a crown, is an attack on the entire Sikh community, who fought and died for Britain wearing those same turbans.
“The Conservatives must suspend him immediately and strip him of his honour. Anything less than that will be condoning blatant racism.”
Heather Kidd, Liberal Democrat candidate for Ludlow, was also at the hustings.
"The audience was obviously shocked. It was the worst kind of unthinking Tory prejudice," she said.
"Mr Dunne apologised quickly, but he should do so again publicly and have a big think about his attitudes, and reflect on his responsibilities.
"The comment came 15 minutes after holier-than-thou assertions that the Conservative Party always acts on Islamophobia and prejudice, which does make you wonder.
"If a full explanation is not forthcoming we're entitled to come to our own conclusions."