Two soldiers and one civilian have been arrested over an alleged conspiracy to kill pro-refugee politicians and - having created the fake identity of a Syrian refugee - make it look like an Islamist attack.
Defence Minister Ursula von der Leyen announced a series of reforms for the NATO member's armed forces, including a review of its 1982 "decree on traditions" which allows the display of Wehrmacht memorabilia within its "historical context".
The current rules "include many good points but allow for back doors," she said, following revelations that Nazi-era army steel helmets, weapons and pictures were on open display in some army barracks.
Amid the scandal, debate has flared on why a Wehrmacht item can be shown in a glass display but not in an officers' mess, and why several barracks are still named after World War II field marshall Erwin Rommel, dubbed the "Desert Fox" for his North Africa campaign.
Von der Leyen had pledged zero tolerance on all forms of extremism after it emerged the top suspect arrested, Lieutenant Franco Albrecht, 28, had expressed racist views years ago but that superior officers looked the other way out of a "misunderstood esprit de corps".
The minister, under fire over the scandal, also announced changes to reporting chains, disciplinary procedures and the civics education of soldiers, speaking before a hearing by the parliamentary defence committee.
Germany's Bundeswehr - including the army, navy and air force - has a troop strength of about 180,000 active military personnel, the second largest in the EU after France.
The bizarre far-right plot has, meanwhile, widened with the arrest Tuesday of a second suspect from the same Franco-German base near Strasbourg, a lieutenant identified only as Maximilian T., 27.
According to prosecutors, Albrecht had managed to create the false identity of a Syrian fruit seller from Damascus and to register himself as a refugee who was granted asylum, a space in a shelter and monthly state benefits.
The suspects' plan, say prosecutors, was to commit an attack, for which they had obtained a pistol and drawn up a hit list of pro-refugee politicians, including then president Joachim Gauck and Justice Minister Heiko Maas.
The pair, along with 24-year-old student Mathias F., had hoped the murder would "be seen by the population as a radical Islamist terrorist act committed by a recognised refugee," said the prosecution.
Germany has taken in more than one million asylum seekers since 2015, many from Syria, Iraq and Afghanistan, amid an initial wave of goodwill followed by an anti-foreigner backlash and a spate of racist hate crimes.