ReutersGermany's Alternative für Deutschland (AfD) party has been designated as right-wing extremist by the country's federal office for the protection of the constitution.
"The ethnicity- and ancestry-based understanding of the people prevailing within the party is incompatible with the free democratic order," the domestic intelligence agency said in a statement.
The AfD came second in federal elections in February, winning a record 152 seats in the 630-seat parliament with 20.8% of the vote.
The parliament, or Bundestag, will hold a vote next week to confirm conservative leader Friedrich Merz as chancellor, heading a coalition with the centre-left Social Democrats.
The far-right AfD had already been placed under observation for suspected extremism in Germany, and the intelligence agency had also classed it as right-wing extremist in three states in the east, where its popularity is highest.
The agency, or Verfassungschutz, said specifically that the AfD did not consider citizens of a "migration background from predominantly Muslim countries" as equal members of the German people.
Outgoing Interior Minister Nancy Faeser said the agency had made a clear and unambiguous decision with "no political influence" after a comprehensive review and a report of 1,100 pages.
Germany's domestic intelligence agency is responsible for both counter-intelligence and investigating terror threats.
Although its change in designation of the AfD is likely to be challenged in the courts, it would likely lower the threshold for the agency using informants and surveillance in monitoring the party.
Domestic intelligence cannot push for a ban on the party - that can only go through parliament, government or the constitutional court - but its latest decision could encourage others to start the process.
The deputy leader of the Social Democrat SPD, Serpil Midyatli, said it was now in black and white what everybody already knew. "It's clear for me that the ban has to come," she said, according to German press agency dpa.
Regardless of the AfD's election success, she said the founding fathers of Germany's post-war constitution had sought to ensure the country would not be plunged back into the abyss.
