The German branch of the Los Angeles-based Church of Scientology has been under observation by domestic intelligence services for more than a decade.
Senior security officials asked state governments in December to begin gathering information on whether they had sufficient grounds to seek a ban. The Church of Scientology welcomed the ministers' decision yesterday as the "only one possible".
Sabine Weber, a spokeswoman for Scientology in Germany, said: "There never was a legal basis to open such proceedings."
The Church further called on officials to end the observation, and what it called "the discrimination and the harassment that go along with it".
Germany has said it considers Scientology to be in conflict with the principles of the nation's constitution.
Erhart Koerting, Berlin's top security official, said: "The appraisal of the government at the moment is that (Scientology] is a lousy organisation, but it is not an organisation that we have to take a hammer to."
Wolfgang Schaeuble, the interior minister, and his counterparts from Germany's 16 states agreed there was not enough proof to justify opening proceedings for such a ban, but domestic intelligence services will continue to monitor Scientology's activities.
The Church of Scientology has long battled to end the surveillance, saying it is an abuse of freedom of religion, and the US State Department regularly criticises Germany for the practice in its annual human rights report.