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.
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.
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.
A referendum takes place on 2 October when Hungarians will be asked to decide on an EU quota to take in refugees.
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 the border and built a fence to stop people crossing on their way to Austria.
Mr Asselborn, whose country is a founder member of the EU, complained that Hungary's border fence was getting higher, longer and more dangerous.