Gabriel was at a visit to Lower Saxony on Friday, when he was accosted by a group of masked protesters holding banners bearing the slogan “Traitor”.
“Man, your father loved his country, and what have you done to it? You're destroying it,” a protester could be heard saying on the video, in a reference to Gabriel's father, who was a Nazi.
The Social Democrat leader, who has publicly condemned his father as a “die-hard Nazi”, turned to face the protesters with a smile, before making the vulgar gesture, which is German is called the Stinkefinger.
His party has confirmed the authenticity of the video posted on Facebook by a youth group linked to the neo-Nazi NPD.
Frauke Petry, the leader of populist party AfD, swiftly condemned Gabriel's gesture, calling him the “unworthy vice chancellor” in a Facebook post.
Gabriel is not the first Social Democrat leader to be seen making the gesture in public.
Former finance minister Peer Steinbrueck sparked a storm of derision and online ridicule in 2013 by allowing himself to be photographed making the vulgar middle-finger gesture.
Support for the Social Democratic Party has been falling in recent months, partly due to the rise in popularity of the AfD.
The AfD, founded on a eurosceptic platform three years ago, has vocally protested Germany's record refugee influx that brought more than one million asylum seekers to Europe's top economy last year alone.