German police say they have seized a "functional" bomb and several model planes that neo-Nazis planned to use against political enemies.
A man with links to far-right extremists was arrested on suspicion of commissioning the bomb, police in the south-western city of Freiburg say.
It would have caused serious injury within a radius of 30 metres, they add.
According to official figures, neo-Nazis committed more than 800 violent crimes in Germany last year.
The flying bomb was discovered last week after police raided the homes of four suspects and a neo-Nazi meeting place in the city following a tip-off, officials say.
They said the plan - which appeared to be at a very early stage - was to fly the device into a crowd of the political enemies of neo-Nazis.
"They want to use it against left-wing or anti-Nazi activists," spokesman for the Freiburg prosecutor's office Wolfgang Maier told the Associated Press news agency.
The main suspect - an unidentified 23-year-old man - had previously hurled fireworks at anti-Nazi counter-demonstrators during a far-right protest last month, police said.
They said they were also investigating two other suspects. A third man alleged to have built the bomb had been detained but was later released on bail.
The plot mirrors one the police said they discovered in June when they raided the homes of Islamists in Germany and discovered a similar conspiracy to make a flying bomb, the BBC's Stephen Evans says.
Flying bombs, he adds, would be a new means of inflicting political violence.
A woman is currently standing trial accused of participating in a string of neo-Nazi murders.