Mr Smith told the BBC's Laura Kuenssberg Labour would be "decimated" if there was an election tomorrow.
He insisted there was "everything still to play for" in the contest and would not rule out standing again if Mr Corbyn won.
Mr Corbyn's campaign said Mr Smith was "desperate" and "resorting to insults".
The current leader points to a surge in party membership under his stewardship as evidence that he is building a "mass movement" capable of winning a general election, with his allies saying the Tories are "in retreat".
But Mr Smith said: "I think that's delusional, and I think Jeremy needs to think a bit more about that straight, honest politics that he started his campaign with."
He said: "The straight, honest truth is that we are right now at our lowest ebb in the polls, ever.
"If there was an election tomorrow Labour would be decimated, and that's got to be a shock to Labour's system."
He said Mr Corbyn was "misleading himself if he thinks we are heading towards an election victory".
If Labour continued on its current "disastrous trajectory", Mr Smith said, it would be left with as little as 140 MPs. It currently has 230, with the Conservatives on 329.
"If Jeremy is deluding himself that we are heading to victory I do not think the rest of the party or the country can afford to be deluded about where we are," he said, claiming Labour was "in the doldrums" and that it faced "Groundhog Day" if Mr Corbyn won.
Labour will announce its new leader at a special conference on 24 September.
Mr Corbyn, who won an overwhelming victory in last summer's leadership contest, is the bookies' favourite.
But Mr Smith said he would "fight this right up until the last minute", saying many people had yet to vote.
Asked whether he would stand for the leadership again if Mr Corbyn wins, he said: "I am not ruling anything in or anything out," adding that this was "a hypothetical question for the dim and distant future".
A spokesman for Mr Corbyn's campaign said: "You can tell things are going from bad to worse for Owen Smith's desperate campaign as he turns his vitriol on Labour members instead of the Tory government.
"The inconvenient truth for Owen Smith is that Labour polled ahead of the Tories in May's local elections; and we have won all parliamentary by-elections under Jeremy's leadership, as well as having won mayoral elections in Bristol, London, Liverpool and Salford.
"Rather than repeatedly talking down our party, and refusing to accept the outcome of this contest, Owen Smith should reflect on his use of such a divisive approach for the rest of this contest."
Labour leadership hopeful Owen Smith has accused Jeremy Corbyn of being "delusional" about the party's prospects of power under his tenure.