"The court finds there is sufficient evidence that the AfD pursues goals that run against the human dignity of certain groups and against democracy," they wrote.
"There are grounds to suspect at least part of the party wants to accord second-rank status to German citizens with a migration background."
The status makes it easier for the domestic intelligence agency BfV to investigate and surveil AfD members or recruit informants from within the organization.
The AfD is topping opinion polls in several eastern states, such as Saxony, that are due to hold elections later this year.
The party has increasingly come under scrutiny from government agencies amid allegations linking it to espionage on behalf of Russia and China.
"It remains to be seen if this decision by the court puts any dent in that [popularity] or possibly, as some suggest, it might even embolden some supporters of the far-right AfD," DW's Young said.
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