Germany's Jewish community has slammed the government for dropping a move to outlaw the country's biggest far-right party that has close links to banned neo-Nazi groups.

Berlin has pulled back from applying to the Federal Constitutional Court to ban the National Democratic Party (NPD) on the basis of its racist, xenophobic and anti-Semitic agenda.

"The decision of the government is disappointing and politically completely wrong," said Dieter Graumann, president of Germany's Central Council of Jews. "The NPD spreads its Nazi poison supported by public funds.

"The government has missed the opportunity to send a clear and credible signal of a strong democracy."

The NPD, whose motto is "Work, family and fatherland", receives public funding because it holds seats in two state legislatures.

Tagesschau news channel said the party had received up to €20m (£17m) in public money since gaining its first parliamentary seat in 2004.

Talks to outlaw the NPD gained ground in 2011 after a report by the public broadcaster ARD suggested that the party may have formed close links with violent gangs.

In December 2012, 16 state governments agreed to pursue a ban of the NPD at the Federal Constitutional Court - the only authority entrusted with such power.

The government was supposed to file a separate case supporting the same cause but interior minister Hans-Peter Friedrich said the idea had been dropped.

"The government doesn't see that filing another application on top of that is necessary," Friedrich said. The administration would still support the bid brought by the country's states, however.

A previous attempt to ban the party under former chancellor Gerhard Schroeder failed in 2003 because of lack of evidence and because witnesses were exposed as intelligence agency informants.

The German intelligence agency has more than 130 active informants in the NPD, who risk exposure if the government moves to ban the party.

Some experts fear the ban could hand a propaganda triumph to the NPD as the party's popularity has waned slightly and despite its successes in economically depressed eastern German states it remains marginalised at a national level.