United Kingdom, France, Australia, Canada and Italy are some of the other countries that have signed the statement.
"We condemn this decision and strongly urge its immediate revocation", the foreign ministers write.
The construction plans would in practice mean that the West Bank is divided and the Palestinian area is divided into two.
The 21 countries note that Israel's finance minister has said that the plan for the so-called E1 area "makes a two-state solution impossible".
"It does not bring any benefits to the Israeli people" ... Instead, it risks undermining security and fuelling further violence and instability, and leads even further away from peace", they write.
In addition to stopping the E1 plan, the signatories demand that Israel lift financial restrictions on the Palestinian Authority that governs the West Bank.
