Germany's constitutional court has rejected a request from the government and parliament to outlaw the neo-Nazi National Democratic Party (NPD) party.
The party receives state funding and is allowed to march in Germany
"The proceedings have been dismissed," said presiding judge Winfried Hassemer.
The court suspended proceedings a year ago after it emerged that the government's case against the NPD was based partly on provocative speeches made by police informers.
The NPD said the government had told the informants to incite racial hatred and recruit violent neo-Nazis to strengthen its case.
Chancellor Gerhard Schroeder's government began a major effort to outlaw the party after a wave of hate crimes in 2000.
The sentence most often heard from the judges' bench was: 'We have problems with the facts - how can we arrive at the
Presiding judge Winfried Hassemer
Both houses of parliament also petitioned the court in 2001 to ban the fringe party, calling it a threat to German democracy.
The government denies planting provocateurs.
But three of the court's panel of seven judges decided that the informers' presence made it impossible to restart the case.
A two-thirds majority would have been required for it to be continued.
Mr Hassemer said the decision was not a judgement on whether the NPD was unconstitutional.
She said it reflected dissatisfaction with the government's methods.
"The sentence most often heard from the judges' bench was: 'We have problems with the facts - how can we arrive at the truth?'"
The NPD's best post-war election result was 4.3% in 1969.
But as an officially recognised party it receives state funding and is allowed to march in German cities.
The case was the first attempt in Germany to ban a party for almost 50 years.