BERLIN German authorities said on Wednesday they had uncovered a network of far-right activists in prisons communicating by secret code.
Among the names on the network's address list was that of a woman who goes on trial next week accused of a series of racially motivated murders.
Wednesday's revelations are embarrassing for Germany, which has been shaken by charges that for decades its intelligence services bungled the monitoring of far-right groups.
The justice minister in the state of Hesse, Joerg-Uwe Hahn, demanded a thorough investigation and confirmed inmates' cells had been searched and letters checked in the last few weeks.
"We don't want to repeat the mistakes made by security authorities in relation to the crimes of the (neo-Nazi cell) the National Socialist Underground (NSU)," Hahn told Bild daily.
"We know that far-right criminals are trying to build up networks and new organizational structures from prisons. We will stop this," he added.
A spokesman for prosecutors in Frankfurt confirmed they had opened an investigation but declined to give further details. It was unclear how far the network stretched across Germany.
The aim of the new network is to offer financial support to inmates and their families and to allow individuals to exchange political views, German media said.
Members communicated via code and hidden messages in letters and small advertisements in magazines.
"Prisons must not become a recruiting ground for neo-Nazis," said lawmaker Ulla Jelpke of the small opposition Left party. "Nazis remain dangerous even when they are behind bars. That has now been made all too clear."
Interior Minister Hans-Peter Friedrich praised the work of the Hesse government and said its justice minister was doing everything possible to ensure any crimes were dealt with.
He noted that the government had in 2011 banned a right-wing organization to help prisoners and families which he described as being a threat to society. With 600 members, it had been Germany's biggest neo-Nazi group.
Hahn said officials had found a list with the name and address of Beate Zschaepe, the woman accused of taking part in a neo-Nazi racist killing spree believed to have been carried out by the NSU cell between 2000 and 2007.
Zschaepe goes on trial with four other suspected accomplices in Munich next Wednesday.
The discovery in 2011 of the NSU, of which Zschaepe is accused of being a founder member, and its alleged murders of eight ethnic Turks, a Greek and a policewoman shocked Germany and exposed shortcomings in its handling of the far-right threat.
An inquiry revealed botched investigations, failure to consider racist motives for the killings between 2000 and 2007, a lack of communication between Germany's intelligence services and a failure to properly monitor members of neo-Nazi groups.
The Munich court has itself caused outrage by refusing to guarantee Turkish reporters access to the high-profile trial .
Foreign Minister Guido Westerwelle said on Tuesday the controversy around the trial risked tarnishing Germany's image.