UPDATE 3-Landmark German ruling to cut far-right party funding fuels debate on AfD

(Adds Scholz quote in paragraph 15, details in paragraphs 16,18)

By Ursula Knapp and Madeline Chambers

KARLSRUHE/BERLIN Germany, Jan 23 (Reuters) - Germany can cut off public funding to the radical right-wing party Die Heimat, the Constitutional Court said on Tuesday in a landmark ruling which stirred up a debate on whether a similar step could be taken against the nationalist AfD party.

The court in Karlsruhe justified its decision to stop state funding and tax relief for six years by saying the National Democratic Party (NPD) and its successor, Die Heimat, aimed to undermine or eliminate the country's democratic system.

It is the first ruling of its kind.

The Bundestag lower house, Bundesrat upper house and government applied in 2019 to the court to strip the party of funding after a change in Germany's Basic Law to prevent radical parties from getting state funds other parties are entitled to.

"(Die Heimat) aims to replace the existing constitutional system with an authoritarian state based on an ethnic 'people's community'," said the court, adding the party's policies disrespected the human dignity of minorities and migrants.

In 2017, the court said the NPD resembled Adolf Hitler's Nazi party but decided against banning it as it was too weak to threaten democracy.

The ruling is being closely watched as mainstream politicians struggle to respond to a surge in the popularity of the far-right Alternative for Germany (AfD), second in most polls. It is also topping surveys in three states in eastern Germany with elections this year.

Interior Minister Nancy Faeser said the decision sent a clear signal to anti-democratic forces, saying right-wing extremism was the greatest radical threat to German democracy.

"We are taking decisive action against all those preparing the ground for right-wing extremist violence," she said.

OUTRAGE OVER DEPORTATION TALK

A report that some AfD party members discussed policies such as mass deportations of people of foreign origin with right-wing radicals has prompted hundreds of thousands of people to take to the streets across Germany in protest.

The AfD has said the "remigration" plans are not party policy. However, intelligence agencies had already classified the party as right-wing extremist in three eastern states.

AfD officials declined to comment on Tuesday's ruling which gave ammunition to some politicians who have proposed trying to withhold funding for the AfD, or at least some branches of it.

"This could be a blueprint for the AfD. The AfD is becoming ever more radical and extreme. This is extremely dangerous," Markus Soeder, conservative state premier of Bavaria, said on X.

Chancellor Olaf Scholz, a Social Democrat, welcomed the ruling and said Germany would see what ramifications it had.

Any legal move against AfD funding would be a protracted process, unlikely to be completed before the 2025 federal vote, let alone this year's European Parliament election.

Among other ideas to curb the AfD are trying to ban it and removing the rights of some radical individuals to prevent them from being elected. However, some politicians argue that action that could be construed as demonising the AfD might backfire.

So far, all mainstream political parties have created a firewall against the AfD, refusing to form a coalition or cooperate with them, even at a local level.

For Die Heimat, meaning The Homeland, the penalty is largely symbolic, as it has failed to cross the threshold in European, federal or state elections needed to qualify for funding. It will, though, no longer benefit from tax relief, widely reported to have amounted to 200,000 euros since 2020.

Die Heimat chief Frank Franz said the ruling was a scandal.

"What has to give way clings to life and sometimes lashes out; the cartel is currently doing this in every nook and cranny," he said on X. (Additional reporting by Andreas Rinke Writing by Madeline Chambers Editing by Kirsti Knolle and Ros Russell)