Stephan Ernst, 45, a far-right militant with previous convictions, was arrested on the basis of DNA evidence for the murder of local politician Walter Lübcke on June 2nd.
Authorities initially said he confessed to the killing. But his lawyer later said the suspect had since retracted his confession.
On Thursday, Germany's federal prosecutor's office said Ernst was suspected of “attempting to kill an Iraqi asylum-seeker in a sneak attack for base motives”.
In the January 6th, 2016 attack in the town of Lohfelden, Ernst had allegedly “approached the victim unnoticed from behind, and then suddenly stabbed him in the upper back with a knife,” said the prosecution service.
“The deciding factor for the act is believed to be the far-right view of the accused,” added the prosecutor's office, which takes the lead on investigations into politically motivated or terror-related crimes.
The suspect, who was arrested in June, remains in custody pending trial.
Lübcke was an outspoken defender of Merkel's decision to welcome refugees and in 2015 drew the wrath of right-wing extremists by telling Germans who objected that they could leave the country.
His killing has deeply shaken Germany, raising questions about whether it has failed to take seriously a rising threat from neo-Nazis.
Investigators have been probing the extent of Ernst's neo-Nazi ties and whether he had links to the far-right militant group National Socialist Underground (NSU).
The NSU killed nine Turkish and Greek-born immigrants and a German policewoman from 2000 to 2007, in addition to carrying out bomb attacks and bank robberies.