A higher regional court in western Germany rejected on Monday an appeal by the Alternative for Germany (AfD) party against its classification as a "suspected" far-right extremist organization.
The judges at the court in Münster said the designation was appropriate and did not violate the constitution or European law.
"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 party criticized the decision, claiming that the proceedings lacked "sufficient clarification of the facts." It said it would "of course" lodge another appeal.
What does the decision mean?
The status makes it easier for the domestic intelligence agency BfV to investigate and surveil AfD members or recruit informants from within the organization.
DW correspondent Simon Young, reporting from Münster, said the court likened the status to a "smoke alarm" to mean that if an alarm went off in a house, police would break down the door to see if there was a fire.
German Interior Minister Nancy Faeser, a Social Democrat, welcomed the decision. "Today's ruling shows that we are a defensive democracy," she said.
The AfD unsuccessfully challenged the designation at a lower court in the western city of Cologne in 2022. It can still appeal the decision on a federal level.
How popular is the AfD in Germany?
The AfD is topping opinion polls in several eastern states, such as Saxony, that are due to hold elections later this year. It is also polling nationally at around 20% amid high dissatisfaction with Chancellor Olaf Scholz's left-leaning ruling coalition.
However, the party is less popular in some major cities and western parts of Germany.
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.