Westerwelle announced the support Wednesday at a German-Palestinian Coordination Council meeting in Berlin, Deutsche Welle reported.
The aid will go toward infrastructure and state institutions as well as a joint technical research program.
The commission was founded in 2010.
"Our aim is a Palestinian state as part of a two-state solution and we support the development of that state not just theoretically, but also practically," Westerwelle said.
He said Germany supported the Palestinian people and the Palestinian administration in Ramallah.
Palestinian Prime Mnister Salam Fayyad welcomed the German aid and said he's glad the European Union has supported his creating state institutions and preparing infrastructure for a future state.
But Fayyad called for more international focus on Gaza and the West Bank.
"The reality is in Gaza and on the West Bank, there are 4.5 million Palestinians who live under occupation, and that must end," Fayyad said. "We have a political conflict. That's the reality and that's what one has to deal with."
Fayyad criticized Israeli settlers' violence against Palestinians, what he called excessive force by Israeli security forces in dealing with Palestinian demonstrators and growing pressure on Palestinian residents of East Jerusalem.