Twenty-nine German police officers have been suspended for sharing pictures of Adolf Hitler and depictions of refugees in gas chambers on their phones.
The officers also used far-right chatrooms where swastikas and other Nazi symbols were shared, officials in North Rhine-Westphalia (NRW) said.
NRW Interior Minister Herbert Reul said it was a "disgrace for NRW police".
It follows several other incidences of far-right extremism among the German security services.
More than 200 police officers were involved in raids on 34 police stations and private homes linked to 11 main suspects. The officers are said to have shared more than 100 neo-Nazi images in WhatsApp groups.
Some of the suspects face charges of spreading Nazi propaganda and hate speech. Others are accused of not reporting their colleagues' actions.
"This is the worst and most repulsive kind of hate-baiting," Mr Reul said, adding that he expected the investigation to find more chats with offensive content.
"I'm appalled and ashamed," said Frank Richter, the police chief in the city of Essen where most of the suspects were based. "It is hard to find words."
Mr Reul has now launched an investigation into the extent of extremism among the state's police.
"Right-wing extremists and neo-Nazis have absolutely no place in the North Rhine-Westphalia police, our police," he said, and the authorities had to show a "crystal clear political profile" that rejected the far right.
Germany's police and security services have faced accusations that they are not doing enough to root out extremists within their ranks.
In July prosecutors said they had arrested a former police officer and his wife who are suspected of sending threats to well-known figures of immigrant background, including several ethnically Turkish lawmakers.
The emails were signed "NSU 2.0", a reference to the "National Socialist Underground" neo-Nazi gang, which committed 10 racist murders between 2000 and 2007.
The scandal has already seen the Hesse state police chief Udo Münch resign after it emerged that police computers were used to find out details of a left-wing politician who later received one of the threatening emails.
Meanwhile, in June, Germany's defence minister ordered the partial dissolution of the elite KSK commando force after growing criticism over right-wing extremism in its ranks.