Well, you want your actors "acting" while they are not speaking, so they need to understand and respond to what is being said between their own lines.  Have him work on that. 

Also, I had the honor of a professional actress work with my cast yesterday.  She was awesome.  And the cast actually listened to her say the same things I've been saying--and more!  She did let me know that if someone is not off-book by deadline, they sit on the sidelines and their understudy replaces them until they can prove they can do a better job.  If there is no understudy, promote someone from stage manager, etc.

It seems to motivate the least professional professional--if you know what I mean. 

Rule #1.  Plays are to be presented as written. I know that often words have to be changed for comunity standards presentatation, but as a general rule, the dialogue is written that way for a reason.

Rule #2.  Few people ever follow rule number one, although read the fine print from the publisher, and you will generally see commentary regarding Rule #1.

Your actor actor did a positive thing.  He came into rehearsals prepared with his script memorized, but maybe no character developed.  It you are allowing actors to be on book, then there should be no problem, but if all actors are off book, the correct their line reading to be accurate.  This is what most SM's or ADs should be doing at notes anyway.

Easiest way to correct the problem is to have your actor score his script with Lines, Subtext, Intentions, and Actions.  This may help with his responses to incorrect cues.

Second, tell him the horror story about the actor that went up on lines during a performance and looked like a deer in headlights until another  actor saved the day and got the show back on track.  Everyone has this story or something like it in their history.

Finally explain that Acting is REACTING and if you don't listen to what people are really saying, then how can you react appropriately.

Two listening exercises I sometimes use:

1) Have the actors do the scene using words OTHER THAN those in the script.  Play the same actions, the same intentions, but with different words.  It forces them to listen because they don't hear the same words over and over.

2) Get a beach ball or a Nerf ball or something and put them in a circle.  Give the ball to one of them and have the actor with the ball start telling a story.  At any time, that actor tosses the ball to another, who has to keep the story going.

Good luck!