The group stands accused of some recent murders in the country.
The Public Security Division of the home ministry issued a notification banning the group on Sunday.
"The activities of Ansar al-Islam threatens peace and stability in Bangladesh... all activities of this group stand banned because they constitute a threat to public order," said the notification.
It is the seventh radical extremist organisation, whose activities have so far been banned in Bangladesh.
The six other groups already banned are Jama'atul Mujahideen Bangladesh (JMB), Jagrata Muslim Janata Bangladesh (JMJB), Harkat-ul-Jehad al-Islami Bangladesh (HUJI-B), Hizb ut-Tahrir and Ansarullah Bangla Team (ABT).
JMB and three other organisations were banned in 2005. Top JMB leaders Shaykh Abdur Rahman Siddikul Islam alias Bangla Bhai were hanged for killing judges at the time.
Hizb ut-Tahrir was banned in 2009 for preaching extremist views.
With the law enforcers cracking down hard on militancy, no significant activities of the radical organisations were seen until the murder of blogger Ahmed Rajib Haider in 2013.
Ansarullah’s existence was unearthed at the time. The organisation’s chief Mufti Jasimuddin Rahmani is serving a jail term for the murder of Rajib. Two of his followers have been sentenced to death, one to life in prison and four others to different terms for killing the blogger.
Police say that after ABT was banned in May 2015, its members regrouped under the banner of Ansar al-Islam.
They suspect sacked army major Ziaul Haque, who masterminded a coup to topple the Sheikh Hasina government in January 2012, is involved with Ansar al-Islam.
The group reportedly claims to be the Bangladesh offshoot of al-Qaeda in the Indian Subcontinent (AQIS).
Police detectives also suspect the group was involved in several militant attacks and murders, including that of writer-blogger Avijit Roy.
Police's counterterrorism and transnational crime unit chief Monirul Islam said in August last year that the agency filed an application with the home ministry to have Ansar al-Islam banned.
He said ABT was first a Facebook group that preached militancy online. It later emerged as Ansar al-Islam, he said.
According to Monirul, the group has three sections -'Dawa, Asqari, and Media'. Dawa looks after logistics and recruitment while Asqari is for military training.
Monirul also said a section called 'Mashul' plans and conducts attacks while the members taking part in the operations are kept under 'Mamur' section.