The 24th edition of Etymologisches Wörterbuch der deutschen Sprache (2002) says the word Nazi was favored in southern Germany (supposedly from c.1924) among opponents of National Socialism because the nickname Nazi, Naczi (from the masc. proper name Ignatz, German form of Ignatius) was used colloquially to mean "a foolish person

http://www.etymonline.com/index.php?allowed_in_frame=0&search=nazi&searchmode=none

In German the Nati of National and Nazi sound similar.