The obituary of Lai, an outspoken critic of Beijing, ran on a full page of the rival Oriental Daily newspaper yesterday in oversized Chinese characters.
It changed the tycoon's name, replacing one character with another that sounds identical, but the biographical details were otherwise identical to Lai's.
It stated that Lai, 65, had died on August 7 of AIDS and cancer, adding that there would be no funeral because his family members were also suffering from illnesses.
"They want me to die? Is it really that easy?" Lai said in response to the obit in a self-made mobile phone video. "Sorry to disappoint you."
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It remains unclear who took out the full page ad for the fake obituary.
Oriental Daily declined to comment when contacted by AFP, and did not respond to further queries.
Lai's office did not immediately respond to queries.
Lai and his Apple Daily newspaper, known for its critical stance on Beijing and support for the city's pro-democracy movement, is no stranger to attacks.
An executive of Apple Daily alleged in a Wall Street Journal interview in June that HSBC and Standard Chartered had pulled advertising from the paper in late 2013 after a request from Beijing.
Neither bank has confirmed the report.
Concerns over media freedom have also grown this year following several attacks on journalists. The former editor of a respected liberal newspaper, Kevin Lau, was savagely stabbed in broad daylight in February.
Political discontent in Hong Kong is at its highest level in years as fears mount that the freedoms enjoyed in the southern Chinese city are being eroded.
Anger in the city has also grown following a white paper published by China in June that reaffirms its control over Hong Kong.
The city was handed back to China by Britain on July 1, 1997 under a "one country, two systems" agreement, which allows residents civil liberties not seen on the mainland, including free speech and the right to protest.