Vice Chancellor Sigmar Gabriel told the German newspaper Bild am Sonntag Sunday that it should be made clear to the kingdom that "the time for looking the other way has passed."
"Wahhabi mosques are being funded by Saudi Arabia all over the world. Many dangerous Islamists come from these communities in Germany," Gabriel said.
Critics say Wahhabism promotes a rigid form of Islam that can be misinterpreted by extremists.
Gabriel's comments come after the German intelligence agency BND warned of the destabilizing role of Saudi Arabia in the Middle East in a memo shared in the German media
The agency report noted that the "current cautious diplomatic stance held by senior members of the royal family might be replaced by an impulsive intervention policy."
German authorities later distanced themselves from BND's report, with government spokesman Steffen Seibert saying on Friday that it was not in line
with the position of the federal government.
Gabriel, who is Chancellor Angela Merkel's deputy, is the most high-profile western politician so far to publicly accuse Saudi Arabia of condoning extremism, but it's not the first time the kingdom has found itself subject to such allegations.
Iraqi Prime Minister Nouri al-Maliki said in an exclusive interview with France 24 in March last year that Saudi Arabia was among those buying weapons for terrorists and supporting them politically.
Saudi officials frustrated
CNN repeatedly tried to reach officials from the Saudi Arabia Ministry of Foreign Affairs, Ministry of Interior and the embassy of Saudi Arabia in Berlin for comment, but none of the calls were answered.
However, Saudi Arabia's Ambassador to London, Mohammed bin Nawaf Al Saud, denied that Saudi Arabia is a supporter of terror saying in a statement
last Wednesday: "Mistrust, misunderstanding and deliberate misrepresentation of Saudi Arabia's role and policy priorities can only upset the delicate act of balancing domestic and international counter-terrorism efforts with the promotion of stability and security in the wider Arab and Islamic world and, as a result, empower the radicals menacing our region and the international community."
Fahad Nazer, former political analyst at the Saudi Embassy in Washington, told CNN that it's clear Saudi officials are frustrated with the perception that Riyadh helped create ISIS and that it supports it financially.
"Those who have made the charge have not been able to present any credible evidence substantiating the claim," he said. "Having experienced the wrath of terrorism first hand on multiple occasions, it would defy all common sense for the Saudi government to support ISIS or any other al Qaeda affiliate anywhere," he said.
Jamal Khashoggi, a prominent Saudi columnist and general manager of Alarab TV, believes the comments by the German Vice Chancellor will not hurt Saudi-Western relations.
"There will never be a coalition to fight ISIS without Saudi Arabia," he said.
Saudi Arabia has invited "all Syrian moderate opposition segments" to meet this week in Riyadh.