Election gains made by German far-right parties have been described as a "catastrophe" by some politicians.
NPD rallies often include skinheads and neo-Nazi paraphernalia
The National Democratic Party (NPD), once compared to Hitler's Nazi party, achieved its best result since 1969 by winning 9% of the vote in Saxony.
Voter discontent with economic hardship has been blamed for the shift towards a party which the German government tried to ban.
Many are worried the results in eastern Germany will give the country a bad name abroad.
But Frank Schwert, a member of the NPD's national leadership, insists their gains were not merely the result of protest votes.
He says the NPD has shown itself to be the "conscience of the people in Saxony".
"The policy of the government in Berlin, instead of supporting the economy, forces people into unemployment and poverty," he told the BBC.
The far-right German People's Union (DVU) also gained more seats in the Brandenburg assembly, polling about 6%.
The NPD's election campaign played down much of the anti-foreigner rhetoric of the party manifesto, focusing instead on the economy, although it did include slogans such as "Close the border".
"We don't want Germany to become an immigration country. But that doesn't mean we are xenophobic," said Mr Schwert.
"Many foreign employees are being brought to Germany because they can be paid less. German employees lose their jobs. No country in Europe or the EU is doing this and we think we have to protect Germany from these tendencies.
"We have good relations with other parties in other countries, like the British National Party in Great Britain and also French and eastern European parties with similar alignments, this is not a sign of xenophobia."
Government efforts to ban the NPD, after a wave of hate crimes by neo-Nazis in 2000, were rejected by the constitutional court last year.
The NPD was accused of inciting a series of hate crimes, but claimed the government had told informants to incite racial hatred and recruit violent neo-Nazis to strengthen its case.
The NPD and other far-right parties have drawn protests from anti-Nazi campaigners
The NPD was founded in 1964 and now has around 5,000 members, compared to the 28,000 it had at its height in the late 1960s.
The party is viewed as more radical than other right-wing parties and organises marches, often joined by skinheads.
Some reports say party members seek to lie about the Nazis' responsibility for the outbreak of World War II and to deny the uniqueness of the Holocaust.
During the campaign to ban the NPD, parliament described the party as a threat to German democracy.
Thomas Kielinger, of the German Die Welt newspaper, says the election results will test the German democratic fabric.
"We have yet to see how the democratic culture of Germany will fair in real economic hardship," he said.
Before the election, the German embassy in London said "extreme right-wing parties like the Republicans (REP), DVU and the NPD are regarded with widespread suspicion and have consistently failed to make political inroads on a national level, lacking sufficient popular support to overcome the 5% hurdle (needed to enter state parliaments)".
Now that they are making inroads, the German government is having to consider whether it is driving voters into the arms of groups it would rather did not exist.