Police conducted dawn raids at the Berlin homes of leading members of the "Frontbann 24" group, described as "the fastest-growing neo-Nazi organisation in Berlin" by Ehrhart Koerting, the city's interior minister.
"The ban should be seen in the context of a decisive fight against far-right efforts in Germany and as an important step towards protecting our free and democratic constitutional order," Koerting said.
The group, which takes its name from a forerunner to the "storm troops" set up in 1924, had previously published material insulting immigrants and Jews.
A spokeswoman for Koerting said the group had between 40 and 60 members but was quickly attracting more. No arrests were made during the raids.
The ban comes a few weeks after prosecutors in Germany charged three people suspected of creating "Hitler Youth"-style camps where uniformed children were "schooled" in far-right racial theory and shown Nazi propaganda.
Many mainstream politicians in Germany have also called for a ban on the most radical far-right party in Germany, the NPD, which has no seats in the national parliament but is represented in two of Germany's powerful regional assemblies.
The NPD, which is on the verge of bankruptcy, made little ground in national elections in September, scoring less than two percent of the vote.