"Any person who belongs to this organisation or who provides services to it or who acts within its framework is henceforth committing a criminal offence punishable by a prison sentence," a government statement said.
The radical branch of the Islamic Movement, based largely in northern Israel, rejects the Oslo peace accords between Israel and the Palestinians and boycotts national elections on the grounds that they give legitimacy to the institutions of the Jewish state.
Police and agents of the Shin Bet domestic security service raided offices of the movement and 17 associated organisations in Arab communities across Israel on Tuesday, police said.
They seized cash, documents and computers.
The government accused the movement's radical branch of stoking a wave of violence across Israel and the Palestinian territories that has left 12 Israelis dead since October 1 and 82 on the Palestinian side, one of them an Arab Israeli.
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The unrest was preceded by disturbances at the Al-Aqsa mosque compound in September triggered by fears that Israel wants to change longstanding rules that allow Jews to visit but not pray at the site, which they revere as the Temple Mount, the holiest of their faith.
The Israeli government has repeatedly denied any plans to change the rules.
"The northern branch of the Islamic Movement has carried out a campaign of incitement to violence for years based on the lie that "The Al-Aqsa Mosque is in danger" and the false accusation that Israel wants to harm the mosque and violate the status quo," the government statement said.
"These activities have provoked a significant rise in tensions at the Temple Mount."
For the past 20 years, the radical wing has held an annual conference under the slogan "Al-Aqsa is in danger", warning that Jews plan to destroy it to build a third temple in its place.
According to biblical tradition, the first and second Jewish temples were located at the site of the Al-Aqsa compound and destroyed by the Babylonians and the Romans.
Last month, the radical wing's leader, Raed Salah, was sentenced to 11 months in jail on charges of inciting violence at the mosque compound in a 2007 speech.