Germany's highest court has rejected a bid to ban the far-right National Democratic Party (NPD), ruling that the xenophobic party poses no threat to democracy due to its dwindling influence.

Judges at the Federal Constitutional Court accepted on Tuesday that the NPD, which is frequently accused of having neo-Nazi links and a racist agenda, pursues unconstitutional goals.

Yet, Andreas Vosskuhle, the court's chief justice, said the party's questionable ideology was not enough to merit a ban, adding that a party would need to be actively working to abolish Germany's free and democratic order.

"There is no concrete evidence carrying weight at present to make it appear possible that their actions will lead to success," Vosskuhle said.

He cited the party's political irrelevance, pointing out that it has only a single seat in the European Parliament and that the NPD's election results have in recent years been "on a low level".

The head of the World Jewish Congress voiced disappointment at the verdict and warned that the party should not be underestimated.

"We must never forget how little time it took Hitler and his party to destroy German democracy, to murder six million Jews and to plunge the entire European continent into mayhem," Ronald S Lauder said in a statement.

"The situation today may be different, but there is absolutely no reason to be complacent. Germany must continue to combat the neo-Nazi movement vigorously."

The German parliament's upper house had applied for the ban at the end of 2013.

THE LISTENING POST: German media - Reporting the rise of the right (8:51)

Heiko Maas, the country's justice minister, said the government respected the verdict, but warned against complacency.

"No ban alone would get rid of xenophobia and racism," he said in a statement.

"Society's struggle against far-right extremism isn't something others can do for us."

Malu Dreyer, governor of Rhineland-Palatinate state and a member of the upper house, said officials would now focus on finding ways to prevent the NPD from receiving taxpayer funds in the future.

'Fully back in business'

The NPD celebrated the verdict on Facebook saying it was "now fully back in business".

It was the second attempt to ban the NPD.

In 2003, the court rejected a previous application because paid government informants within the group were partially responsible for evidence against it.

Only two parties have been outlawed in West Germany and reunited Germany - the neo-Nazi Socialist Reich Party in 1952 and the German Communist Party in 1956.