Named “Sturm 34” after a local group of wartime stormtroopers, the organisation had targeted non-Germans and hoped to create “national liberated areas” free of foreigners by committing violent acts.
The state's interior minister Albrecht Buttolo, a conservative, said that the aims of “Sturm 34” were in clear violation of the German constitution.
The group required new members to show their loyalty through acts of brutality.
“The more brutal one was, the more respect one gained,” Mr Buttolo said.
Police were investigating links between the group and the far-right National Democratic Party which took almost a tenth of votes in a 2004 state election.
The group has 50 members, including professionals, students and unemployed people, and around 100 sympathisers.
Germany's domestic intelligence agency estimate that there are around 40 to 50 similar far-right groups in the formerly Communist eastern state, one of the worst regions of Germany for neo-Nazi attacks.