After first calling on a woman close to the stage to "shout it out" again, Trump repeated the woman's one-word insult aimed at Cruz: "She said he's a pussy."
The term was flung into the political orbit just a day before the New Hampshire primary as Trump was discussing Cruz's apparent hesitation during the last GOP debate on whether he would support waterboarding.
Suddenly, Trump stopped mid-sentence, pointing to a woman near him in the crowd: "She just said a terrible thing."
"You know what she said? Shout it out because I don't want to say," Trump continued as the woman appeared to loudly shout the vulgar word again.
But realizing most of the crowd could not hear the woman, Trump decided to take matters into his own hands.
"OK you're not allowed to say and I never expect to hear that from you again. She said -- I never expect to hear that from you again -- she said he's a pussy," Trump said as the crowd erupted into a roaring cacophony of laughter and applause.
"What kind of people do I have here?" Trump joked after the crowd's reaction.
Katrina Pierson, a Trump campaign spokeswoman, defended Trump's use of the word Tuesday morning on CNN's "New Day."
"Mr. Trump is exercising his free speech. It was in fun with the audience," she said.
Alice Stewart, a Cruz spokeswoman, said Trump was out of line.
"There are certain words and certain phrases that are just not suitable for running for president," she said on "New Day."
Cruz during the last debate backed the practice of waterboarding, which is considered torture by international law, but said that he would not "bring it back in any sort of widespread use."
Rick Tyler, Cruz's communications director, called the incident just the "latest episode in the reality show that Donald has made the 2016 campaign."
"Let's not forget who whipped who in Iowa," he said.
While Cruz contended that waterboarding was not torture, Trump was more direct in his defense of the practice during the debate.
"I'd bring back waterboarding," Trump said during the debate. "And I'd bring back a hell of a lot worse than waterboarding.
After repeating the woman's insulting characterization of Cruz, Trump noted that the press has previously castigated him for not reprimanding offensive and controversial statements his supporters have made at his rallies.
"So I just want to tell you right now, ma'am, you're reprimanded," Trump said as his crowd laughed.
The woman who yelled the vulgarity that Trump repeated is a 52-year-old Salem, New Hampshire, resident named Caroline, who declined to give her last name.
She told CNN that she went to the rally hoping to ask Trump a question about how he would crack down on tax fraud committed by undocumented immigrants.
"He truly cares about the American people," she said.
She said she did not plan to yell out a vulgarity, but when Trump mentioned Cruz, she said she couldn't help herself.
"It just came out of my mouth," she said. "It wasn't like I thought about it."
Afterwards, she said,"Everybody behind me was just patting me on the back."
She said she knew that Trump was kidding when he reprimanded her.