Luxembourg Foreign Minister Jean Asselborn has called for Hungary to be suspended or even expelled from the European Union because of its "massive violation" of EU fundamental values.
He cited the Budapest government's treatment of refugees, independence of the judiciary and freedom of the press.
"Hungary is not far away from issuing orders to open fire on refugees," he suggested.
Hungary said Mr Asselborn "could not be taken seriously".
EU leaders meet in Slovakia on Friday to discuss the union's future.
Mr Asselborn's interview with German daily Die Welt is likely to inflame passions ahead of the summit.
The EU could not tolerate "such inappropriate behaviour", he said, and any state that violated such basic values "should be excluded temporarily, or if necessary for ever, from the EU''. It was "the only possibility to protect the cohesion and values of the European Union,'' he said.
Hungarian Foreign Minister Peter Szijjarto hit back, saying that his Luxembourg counterpart had "long left the ranks of politicians who could be taken seriously". Mr Asselborn was a "frivolous character", he said, adding that he was "patronising, arrogant and frustrated".
Mr Asselborn's remarks also drew condemnation from Latvia's foreign minister, who spoke of "megaphone diplomacy".
And German Foreign Minister Frank-Walter Steinmeier, a personal friend of the Luxembourg minister, said while he could understand some in Europe were "becoming impatient, it is not my personal approach to show a member state the door".
Hungary joined the EU in 2004 and while the European Union can reject or delay a candidate from joining, it is not thought to have the power to expel an existing member state.
When the far-right Freedom Party joined Austria's government in 2000, EU member states responded by freezing bilateral diplomatic relations with Austria. Later that year the EU ended Austria's diplomatic isolation.
Hungary was caught up in an enormous influx of migrants and refugees a year ago as more than a million people headed through central Europe from the shores of Greece towards Germany and other Western European countries.
Eventually, it sealed its borders with Serbia and Croatia and built a 175km (110-mile) razor-wire fence to stop people crossing on their way to Austria. Some 10,000 police and soldiers have been deployed to guard the frontier.
Hungary's diplomatic fallout - BBC's Nick Thorpe
Hungary's Foreign Minister Peter Szijjarto has reacted with fury.
The head of Hungarian diplomacy described his Luxembourg counterpart as a "classic nihilist" who worked tirelessly to destroy Europe's security and culture. By way of contrast, Hungary was defending not only its own territory, but that of the EU as well, the foreign minister insisted.
"Only Hungarians have the right to decide who they wish to live with."
The number of migrants trying to enter Hungary has fallen dramatically in recent weeks.
At the Horgos Transit Zone on the Hungary-Serbian border, only 80 were waiting on Monday, down from 800 on some days in July.
Beside the Kelebia Transit Zone there were about 60, mostly from Syria and Iraq. Some had been living in atrocious conditions next to the razor wire fence for more than 10 weeks.
Approximately 4,500 migrants are currently in camps in Serbia. Most are now trying alternative routes to Europe through Croatia, Montenegro and Bosnia.
A referendum takes place on 2 October when Hungarians will be asked to decide on an EU quota to take in refugees. Prime Minister Viktor Orban has strongly criticised the EU's plans to relocate 160,000 refugees across the bloc and his government has campaigned vigorously for a No vote.
Mr Asselborn, whose country is a founder member of the EU, complained that Hungary's border fence was getting higher, longer and more dangerous.
His remark that Hungary was not far from ordering live fire is likely to refer to a decision by police earlier this month to recruit 3,000 "border-hunters". The new force will carry pepper spray and pistols with live ammunition as part of their task to keep migrants out.
What are the EU's fundamental values?
In the Treaty on European Union (Article 2) EU values are spelt out as "human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities".
The EU's Charter of Fundamental Rights became legally binding on national governments as well as the EU's institutions, as part of the 2009 Lisbon Treaty.
Those rights and freedoms range from freedom of thought and expression to the right to asylum, a fair trial and fair working conditions.
As a condition of membership of the EU, a candidate country has to fulfil 35 separate chapters of requirements including an independent judiciary.