"@realDonaldTrump You are a disgrace not only to the GOP but to all America," Prince Alwaleed said on his official Twitter account, @Alwaleed-Talal, addressing Mr Trump and referring to the Republican Party.
"Withdraw from the US presidential race as you will never win."
Prince Alwaleed, a nephew of Saudi Arabia's King Salman and a devout but moderate Muslim, has holdings in a number of international companies, including Twitter and Citigroup. He chairs Kingdom Holding Co, and in July he said he will donate US$32 billion to charity in coming years via Alwaleed Philanthropies.
The diversified firm's interests include US-banking giant Citigroup.
A statement early on Saturday from Prince Alwaleed's office said his tweet was in response to Mr Trump's "anti-Islam statement".
Within hours, Mr Trump's response came back, also on Twitter.
"Dopey Prince @Alwaleed-Talal wants to control our US politicians with daddy's money," he said. "Can't do it when I get elected."
Mr Trump's comments have already cost him business in the Middle East, with a major chain of department stores halting sales of his glitzy "Trump Home" line of lamps, mirrors and jewellery boxes.
On Thursday, Dubai real estate firm Damac, which is building a US$6 billion golf complex with Mr Trump, stripped the property of his name and image.
Mr Trump, the frontrunner for the Republican nomination, has been lambasted both in the US and abroad for his proposal made on Monday to temporarily bar Muslims from entering the US.
Mr Trump's comments followed a shooting rampage by a Muslim couple in San Bernardino, California, which left 14 dead. - AFP/Reuters
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