The hostel came under scrutiny after German media reported that the North Korean embassy was the owner of the prime real estate.
Located downtown next to the gated North Korean embassy, Cityhostel Berlin offers dorm beds for as little as 16 euros ($17) a night.
But it came under scrutiny after German media reported that the North Korean embassy was not just the hostel's neighbour but also owner of the prime real estate.
Rented out since 2004, the property fetches Pyongyang some 38,000 euros per month in rent, public broadcaster ARD said.
Foreign ministry spokesman Martin Schaefer cited a UN Security Council resolution that requires member states to only allow "North Korean foreign representations to carry out diplomatic and consular activities".
"Any kind of commercial activity on the site of the embassy or in relation to the embassy is prohibited," he said.
"Cityhostel in Berlin constitutes neither a diplomatic nor consular activity of a North Korean foreign representation," said Schaefer, adding that the government will move to "shut down the financial source to the North Korean regime as quickly as possible".
Over the past 11 years, the Security Council has imposed six sets of sanctions on Pyongyang -- two adopted last year -- to significantly ramp up pressure and deny the North Korean regime the hard currency revenue needed for its rocket and atomic programmes.
But UN sanctions experts have repeatedly told the council the measures have had little impact because they have been poorly implemented.
Pyongyang is seeking to develop a long-range missile capable of hitting the US mainland with a nuclear warhead, and has so far staged five nuclear tests, two of them last year.