The Budapest Court of Appeal on Thursday ruled to ban the Hungarian Guard, the far-right wing of the radical nationalist party Jobbik.
But Jobbik's leader said the Guard's members will continue their activities.
The court ruling said the Guard's activities overstepped its rights as an association and curtailed liberties of the Roma, or Gypsies, both of which justify its ban.
The Hungarian Guard was registered by Jobbik in June 2007 as a cultural association. Guard members regularly hold military-style training, wearing black uniform which critics say is reminiscent of the Nazi era.
In December 2007, the Hungarian Guard held an anti-Roma march in Tatarszentgyorgy, a village in central Hungary. Last December, the Capital Court made a decision to dissolve the group, saying speeches about "Gypsy crime" made during the event had insulted the dignity of the local Roma minority.
According to reports of Hungarian News Agency MTI, Gabor Vona, leader of both Jobbik and the Guard, said that they will appeal the ruling to the Supreme Court.
Minister of Justice Tibor Draskovics said the decision made by the Court of Appeal was a great victory for rule of law and an evidence that the country is able to defend itself against all unconstitutional attempts.
The governing Socialist Party also welcomed the court's ruling. Spokesman Istvan Nyako said the decision mitigated the grave danger that the neo-Nazis poses on democracy.
Orban Kolompar, chairman of the National Gypsy Authority, said the ruling was good for the Roma and for the whole country.