Explaining the comment, Cruz said that New Yorkers lean towards "socially liberal" views.
Trump responded with a heartfelt recollection of the terror attacks on 9/11.
“It was with us for months," Trump said. “And everybody in the world loved New York, loved New Yorkers -- and I have to tell you, that was a very insulting statement."
Even Cruz applauded his rival’s rebuttal.
After the clash, Trump talked to INSIDE EDITION backstage.
"I don't like when people insult New York," he said. "New York has gone through so much. So much with the World Trade Center and the death. Two massive 110-story buildings falling down and we took the hit for the nation. They rebuilt and did an incredible job."
He added: "I don't think anyone should be attacking 20 million people."
It wasn't the only time Trump and Cruz knocked heads. Trump questioned if Cruz could legally be president because he was born in Canada. Some in the audience booed.
Cruz fired right back.
"Back in September, my friend Donald said he had his lawyers look at this from every which way and there was no issue there," Cruz said. "There was nothing to this birther issue. Now, since September, the Constitution hasn't changed, but the poll numbers have."
Trump interjected saying: “I was born here. Big difference."
In response, Cruz brought up the real estate mogul’s mother, who was born in Scotland.
"I'm not going to use your mother's birth against you," Cruz said.
The Trump and Cruz showdown dominated what was probably the most raucous GOP debate yet.
Marco Rubio went at it with Chris Christie saying: “Unfortunately, Governor Christie has endorsed many of the ideas that Barack Obama supports, whether it is Common Core or gun control or the appointment of Sonia Sotomayor or the donation he made to Planned Parenthood."
Christie responded: "When you're a senator what you get to do is just talk and talk and talk, and you talk so much that nobody can ever keep up with what you're saying is accurate or not."
So who won the showdown in South Carolina? Commentators are divided. NBC News’ Chuck Todd declared Trump the winner while Fox and Friends said Cruz.