"It concerns a so-called Imperial War Flag from the years between 1935 and 1945 - with a very large swastika in the middle," head public prosecutor Helmut Walch told news agency DPA, confirming a report earlier this week by German daily Süddeutsche Zeitung.
A police officer observed during the ceremony how neo-Nazi NPD party member Thomas Wulff laid the banned flag over the casket. By Monday the the public prosecutor's office in the German state of Bavaria had retrieved the flag from the grave and said they are now investigating the incident.
Should they decide to press charges, Wulff faces fines and up to three years in prison for the use of symbols considered illegal by the German constitution.
The former SS soldier's burial was attended by some 90 neo-Nazis, including party leader Udo Voigt, who spoke at the event. Eleven party members were temporarily arrested after the funeral for getting rowdy.
According to newsmagazine Der Spiegel, the man they were honouring, 79-year-old Friedhelm Busse, volunteered for the Waffen-SS in 1944 and later served in an anti-tank unit. He remained active as a neo-Nazi after the war, joining both the NPD and leading the Free German Workers' Party (FAP), which was forbidden in 1995.
He was once sentenced to 28 months in jail for incitement for allegedly saying: "When Germany is free of Jews, then we won't need Auschwitz any more."