Germany's domestic security agency has placed the far-right Alternative for Germany (AfD) party under surveillance for posing a threat to democracy, parliamentary sources said, dealing a blow to the anti-immigration party in a big election year.

The Federal Office for the Protection of the Constitution (BfV) has classified the AfD as a "suspected case" of ties to right-wing extremism, the sources said.

The decision, made last week according to a report in Der Spiegel weekly, will allow intelligence agents to shadow the party, tap its communications and possibly use undercover informants.

It follows a two-year investigation and a report containing over 1,000 pages of evidence, including several hundred speeches and statements by AfD members at all party levels, Der Spiegel said.

However, politicians as well as candidates standing in September's general election will be excluded from the monitoring, said the parliamentary sources, noting that such surveillance would have required even more stringent justifications.

The BfV said it was unable to comment on the case in view of pre-emptive urgent proceedings filed by the AfD against the agency's bid to class it a "suspect case".

Alice Weidel, head of the AfD parliamentary group, said the party would take legal action against the decision and accused the BfV of playing politics.

"This is particularly remarkable in view of the upcoming state and federal elections this year," Ms Weidel told the DPA news agency.

Co-leader of the parliamentary group of the AfD Alexander Gauland addresses a news conference after the party was placed under surveillance by Germany's domestic security agency

The anti-Islam, hard-right AfD has often courted controversy by calling for Germany to stop atoning for its World War II crimes. Senior figure Alexander Gauland once described the Nazi era as just "a speck of bird poo" on German history.

Starting out at as an anti-euro outfit in 2013, the AfD capitalised on public anger over Chancellor Angela Merkel's 2015 decision to allow in asylum seekers from conflict-torn countries like Syria, Afghanistan and Iraq.

The AfD took nearly 13% of the vote in the 2017 general election, allowing it to make its debut in the German parliament where it is also the biggest opposition party.

But with the migrant influx waning and with the coronavirus pandemic roiling Germany, the AfD has seen its popularity fall while Mrs Merkel's handling of the health crisis has won her plaudits.

It faces six regional elections this year and a general election on 26 September, the first in over 15 years that will not feature Merkel, who is retiring from politics.

Latest surveys show the party's popularity at just 9-11%.

The BfV had already placed a radical fringe of the party known as The Wing under surveillance last year over associations with known neo-Nazis and suspicions of violating the constitution.

The faction, led by Bjoern Hoecke, dissolved itself last March but many of its 7,000 members remain active in the AfD.

The Wing's continued influence in the party was one of the reasons for the BfV decision, according to Der Spiegel, along with links to various other right-wing extremist organisations.

The AfD's regional branches in Thuringia, Brandenburg, Saxony and Saxony-Anhalt have also been designated as "suspected cases" of right-wing extremism.

Head of Germany's Central Council of Jews, Josef Schuster, welcomed the classification as a "right and necessary step".

"With its destructive politics, the AfD contributes to undermining our democratic structures and to discrediting democracy," he said.