Multiplying both sides of the polar equation by $\rho$, we get $\rho^2 = 2\rho\cos\theta - 4\rho\sin\theta$,
which can be converted into Cartesian coordinates as: $x^2 + y^2 - 2x + 4y = 0$,
which simplifies to $(x-1)^2 + (y+2)^2 = 5$. This equation represents a circle.
Therefore, the correct choice is $\boxed{\text{C}}$.