By Caroline Copley

BERLIN (Reuters) - Xenophobia is rising in the ex-communist east of Germany and risks tarnishing its reputation as a place to do business, the government said on Wednesday as it published its annual report on the state of German unification.

Far-right violence and attacks on migrants rose dramatically last year, with riots and arson attacks on refugee shelters in the towns of Heidenau and Freital in Saxony state. More than one million, mainly Muslim migrants from the Middle East, Africa and Asia streamed into Germany over the course of 2015.

"Right-wing extremism in all its forms poses a very serious threat for the social and economic development of the new states," Iris Gleicke, the federal government's commissioner for eastern German affairs, said, referring to the five states that comprised Communist East Germany from 1945 to 1990.

Germany recorded 1,408 violent acts carried out by rightist supporters last year, a rise of more than 42 percent from 2014, and 75 arson attacks on refugee shelters, up from five a year earlier, according to an annual report by the BfV domestic intelligence agency published in June.

Attacks were more frequent in east German states. There were 58.7 cases of far right-motivated violence per 1 million inhabitants in Mecklenburg-Vorpommern last year, compared to the average of 10.5 cases in west German states, the report said.

Gleicke said the vast majority of east Germans were not xenophobic. But she urged civil society groups and businesses to speak out more loudly against far-right extremism.

"Society should not look away when people are attacked or refugee shelters are set on fire. A lot is on the line for east Germany," said Gleicke, who is from the east.

Heidenau in Saxony became infamous when anti-refugee riots broke out and Chancellor Angela Merkel - who grew up in East Germany - was heckled by far-right activists as an alleged traitor for her open-door policy towards refugees.

Germany's acceptance of more than one million refugees last year boosted popular support for the anti-immigrant Alternative for Germany (AfD) party, which is now represented in all of the eastern federal states.

On trips abroad to Japan and California to try and drum up investment into east Germany, Gleicke said her interlocutors had cited concern about whether their foreign staff would be welcome and whether their investments would be safe.

"It's quite clear that a location that doesn't show itself to be liberal-minded will face economic disadvantages," she told a news conference.

More than 25 years after reunification, gross domestic product (GDP) per capita in east German states still lags that of west German states by more than 25 percent, hindered by a population decline and a lack of major employers.

Not a single company in Germany's blue-chip DAX index is headquartered in the east.

(Reporting by Caroline Copley; editing by Mark Heinrich)