JAMEL, Germany | This is a town taken over by neo-Nazis. Wooden signposts by the main road point to Vienna, Paris and Braunau am Inn – the Austrian birthplace of Adolf Hitler. From home, a far-right leader runs his demolition company, its logo featuring a man smashing a Star of David with a sledgehammer.

Every few months, townsfolk host outdoor parties where guests sing “Hitler is my Fuehrer” and chant “Heil” around a massive bonfire.

Jamel is the most extreme manifestation of a chilling phenomenon in the former communist East Germany: a creeping encroachment of neo-Nazism that makes Mecklenburg-Western Pomerania one of only two states where Germany‘s biggest far-right party, the National Democratic Party (NPD), sits in parliament.

The extreme right is thought to be behind about 40 attacks in the state over the past year, including stones thrown through windows of political parties and fireworks blown up in a prosecutor’s mailbox. Last year in Jamel, witnesses say, a neo-Nazi punched a visitor and shouted his allegiance to Hitler.

The state has Germany‘s highest unemployment rate outside Berlin, at 12.7 percent in December, and few industries – fueling xenophobia on which the neo-Nazis have capitalized. Only 2 percent of the population is foreign-born, but officials say that lack of immigrant contact itself has reinforced suspicions.

“Federally, the Islamic extremists are the biggest problem; for us, the extreme right is the biggest problem,” said Reinhard Mueller, who heads the state branch of Germany‘s domestic intelligence agency.

In Jamel, six of the 10 houses are in the hands of the far right, and authorities consider 10 of the village’s 28 adults right-wing extremists. Town life is dominated by one man: Sven Krueger, a 36-year-old leading NPD official, who grew up here.

Officials say Mr. Krueger has been known to authorities for small-time criminal activity, but he has stayed off the radar in recent years after turning to politics. That changed two weeks ago, however, when Mr. Krueger was arrested on charges of receiving stolen property and weapons violations after a five-month investigation.

In a search of his home, authorities confiscated power tools they suspected were stolen and a submachine gun with 200 rounds of ammunition.

A few days before the arrest, a pit bull and a German shepherd roamed the fenced yard of Mr. Krueger‘s home in the middle of town, and an NPD poster with the pledge “We keep our word” hung from a blue industrial trash bin out front that is filled with waste from his demolition work. A woman smoking a cigarette in the yard said she didn’t know where Mr. Krueger could be found.

At the end of the road, a man in a green tank top with closely cropped hair and arms covered with tattoos ran out of another house and yelled to a photographer, “Get out, you dirty pest.” Others did not answer their doors, and Mr. Krueger did not answer calls to his business or cell phone.

His demolition company’s main building, about six miles away, doubles as the regional NPD headquarters.

It is set behind a 6-foot wooden fence topped with razor wire; a guard tower shines a floodlight at night, and dogs bark incessantly through the padlocked steel gate. The German imperial flag used in the last years of the Kaiser flies overhead – a common neo-Nazi substitute for the outlawed swastika banner. Through the fence on an inside door, the smashed Star of David logo can be seen.

Little can be done legally to expel the neo-Nazis. They carefully skirt German laws against displaying Nazi symbols,such as the swastika or the SS runes, and the banned songs people hear in the night cannot be pinned on any individual.

Still, residents say their sympathies are clear. Horst and Birgit Lohmeyer, who have lived in Jamel for the past seven years, say the local far-right scene has attracted scores of neo-Nazis for parties a few times a year – including several hundred at Mr. Krueger‘s wedding last summer.

“They sit around the bonfire and sing these songs – ‘Adolf Hitler is mein Fuehrer,’ they sing. They call out ‘Heil.’ There are sometimes as many as 300 right extremists at these parties,” Mrs. Lohmeyer said.

In protest, the Lohmeyers organized a party of their own – an annual music festival on their nearly 2-acre property that started in 2007.

“We hold this festival for democracy and tolerance to show that this town is not entirely in right hands – that there are others here who don’t believe in their ideology,” Mrs. Lohmeyer said.

The regional mayor of the 2,700-person district said he hopes the attention will help expose the agenda of the NPD to people who otherwise may have voted for them again in September.

The party won 7.3 percent of the vote when Mecklenburg-Western Pomerania, where Chancellor Angela Merkel has her constituency, last held state elections in 2006, giving them six of 71 seats.

“The NPD is nothing less than the successor to the Nazi party, and their goals are the same,” Mayor Uwe Wandel said in an interview at the Mercedes dealership he runs about 200 yards from Mr. Krueger‘s demolition company.

“Maybe today they’re not talking about Jews but about foreigners in general, but their ideals are exactly the same.”

Mr. Krueger was the only known far-right extremist in the village when the Lohmeyers moved there in 2004 from Hamburg. But his presence started attracting more extremists; as they moved in, others moved out – and Mr. Krueger encouraged his friends to buy up the property.

Mrs. Lohmeyer said she and her husband for the most part keep to themselves in their 150-year-old restored farmhouse with their 13 cats. She said they haven’t suffered any retaliation from the neo-Nazis for holding their music festival.

The NPD is marginalized at the national level in Germany, and wherever the party holds rallies, the hundreds who show up are dwarfed in numbers by thousands of counterdemonstrators.

Although its popularity has slipped slightly in Mecklenburg-Western Pomerania, it appears poised to remain at more than the 5 percent of the vote needed to keep its seats in the upcoming Sept. 4 state election.

Germany‘s domestic intelligence agency estimates that as of 2010, there were about 1,400 far-right extremists in Mecklenburg-Western Pomerania – a small fraction of the state’s 1.6 million population.

Of them, 400 are NPD members. Still, officials acknowledge the far-right extremists in the state make up a disproportionate number of Germany‘s overall 26,000.