"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".
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