Speaking to reporters, Naidu asked Rao -- widely known as KCR -- to withdraw his remark.
Naidu took strong exception to the comment by the chief minister while criticizing the central government's directive to handover to the governor powers for maintaining law and order in Hyderabad.
Naidu said Rao had given a new definition to "fascism".
"Anti-democratic approach is called fascism," he said, and clarified that implementing an act passed by parliament can't be called fascism.
Naidu reminded the Telangana chief minister that the Andhra Pradesh Bifurcation Act gives special powers to the governor.
"Is he (Rao) not aware of the fact that the previous government approved the bill? Those who celebrated the passing of the bill should know what it says."
Dismissing the allegations of Telangana Rashtra Samithi (TRS) that the central government was acting against the federal spirit, the Bharatiya Janata Party (BJP) leader said states have to cooperate with the central government.
Naidu also lashed out at the Congress for its "vote-bank politics" and alleged that this had damaged the country.