The party has been growing in popularity and came second in February’s general election.
The country’s domestic intelligence agency said on Friday that it was an extremist entity which threatens democracy.
Its 1,000-page internal report claimed views around ethnicity held by the AfD aim to exclude certain groups from equal participation in society.
“The party’s prevailing understanding of the people based on ethnicity and descent is incompatible with the free democratic basic order,” the agency said in a statement.
“Specifically, the AfD considers, for example, German citizens with a migration background from predominantly Muslim countries not equal members of the ethnically defined German people.”
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The party leaders have consistently denied the party is either far-right or extremist.
Local branches of the party in the east German states of Thuringia, Saxony, and Saxony-Anhalt had already been classified as extremist by regional spy chiefs.
The entire party was also previously designated “suspected” far-right extremist.
However, today’s announcement allows intelligence agencies to increase surveillance on the group.
It may also embolden opponents to try to get the party banned.
The decision was welcomed by the country’s interior minister, Nancy Faeser, who said in a statement that the new assessment was “clear and unequivocal”, adding that the party “discriminates against entire segments of the population and treats citizens with a migration background as second-class Germans”.
She underlined that “there has been no political influence on the findings” but said the new classification was likely to be subject to judicial review.
Chancellor Olaf Scholz said that although the intelligence agency has provided a “very detailed justification” for the decision, “ban proceedings must not be rushed”.
Anton Baron, a regional lawmaker in the state of Baden-Wuerttemberg, described the decision as “politically questionable”.
While the ruling is a blow for the party, it is unlikely to influence hardcore supporters, many of whom live in states where the party was already designated extremist at a local level.
The AfD has been contacted for comment.
