The local politician, who cannot be named for legal reasons, was detained along with three other men over the weekend in the Swedish province of Halland.
The four suspects were all arrested as part of an investigation into the discovery of large quantities of dynamite in a house belonging to one of the men.
The politician was arrested by police as he attempted to leave the house in his car, in which detectives then discovered dynamite blasting caps in a plastic bag.
The caps are normally used to trigger larger quantities of dynamite and plastic explosive from a distance.
The man was subsequently released from custody, but is still subject to ongoing investigation by detectives. He claims that he was unaware of the presence of the caps in his car according to reports in the Swedish newspaper Dagens Nyheter.
At the same time as police discovered the material they also arrested a 30-year-old man, who neighbours claim had been carrying out test explosions on ground behind the property.
It is understood that the second man confessed to use of the explosive in a police statement. Two other men were also detained by authorities as part of their investigations.
The 30-year-old man had previously been convicted for attacking a foreign-born neighbour with an axe and was found to be in possession of pictures of Hitler, German war memorabilia and Nazi SS flags by police who searched his home.
It is unclear whether or not the explosives and associated equipment was intended to be used in an attack, but police have not ruled it out.
“That we can only speculate on. We have nothing that points to such an attack at present, but are open to the possibility” said Tommy Nyman, a spokesperson for the Swedish Police force in the region.
SÄPO, the Swedish security service, have also begun an investigation into events.
“We have found signs that he had Nazi sympathies” added Nyman with regards to the 30-year-old suspect. “There are objects and symbols which you would link to ideological extremism.”
The politician is not himself suspected of possessing such extremist material, but it is understood the two men knew one another.
The Sweden Democrats immediately issued a statement to the press saying that the party member arrested by police has been relieved of office. Founded as part of the Nordic white power movement in 1988, they have been forced to expel several members over allegations of racism and extremism.
The party, who share a European Parliament group with UKIP and strongly oppose immigration, feminism and multiculturalism, are currently the third biggest in Sweden. Until the mid 1990s members would regularly wear military-style uniforms at meetings and two of their senior parliamentary deputies were involved in a drunken attack on the Swedish-Kurdish comedian Soren Ismael with a piece of scaffolding in 2010.
Far-right extremism is a problem throughout the Nordic countries and Scandinavian security services constantly monitor far-right groups.
In 2011 Norwegian Neo-Nazi Anders Behring Breivik attacked a government building in Oslo using a homemade fertiliser bomb before embarking on a shooting spree that left 69 dead.
Recent elections have seen significant gains for right-wing populist parties in Norway, Sweden, Finland and Denmark on a strongly anti-immigration and culturally nationalist platform.
Sweden has also seen an increase in attacks on Islamic and Jewish community centres, with some now subject to police protection.