While Pegida had previously attracted "heterogeneous" support and taken "moderate" positions, it had developed "an increasingly right-wing extremist orientation", Saxony's domestic intelligence agency LfV said in a statement.
"By regularly offering right-wing extremists a platform to propagate anti-constitutional ideologies, this movement acts as a hinge between extremists and non-extremists," said agency president Dirk-Martin Christian.
He added that "all people and activities" within the group would now be put under surveillance, with the exception of those merely taking part in peaceful demonstrations.
Pegida, which campaigns against what it calls the "Islamisation of the West", was born in October 2014 with xenophobic marches every Monday evening.
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Its protests gained momentum during the refugee crisis of 2015, when Germany became deeply polarised over Chancellor Angela Merkel's decision to keep the country's doors open to hundreds of thousands of asylum seekers, many from Iraq or Syria.
The movement's popularity coincided with the rise of the far-right AfD party, which entered parliament for the first time in 2017 on an anti-refugee and anti-immigration platform.
Pegida has previously been declared as extremist and put under observation by spy agencies in other German states such as Bavaria.
One of its leading members, Lutz Bachmann, has faced multiple convictions for sedition, most recently in December 2020.
Germany's domestic intelligence agencies monitor a range of individuals and groups from across the political spectrum who are suspected of extremist tendencies.
In a move later blocked by Germany's Consitutional Court, the national intelligence service BfV said in March that it was placing the entire AfD party under surveillance for posing a threat to democracy.
Two weeks ago, the agency said it would also monitor members of the so-called "Querdenker" (Lateral Thinkers) movement, which has emerged as the loudest voice against coronavirus curbs and an active promoter of conspiracy theories that deny basic facts about the pandemic.
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