Westerwelle, who spoke after talks with Palestinian prime minister Salam Fayyad in Ramallah, did not specifically refer to Palestinian plans to seek UN recognition and membership in September.
But he stressed that negotiations between Israel and the Palestinians remained the best way to achieve a peace deal, even though talks have been on hold since late September 2010.
"The German government thinks that unilateral steps would be very counterproductive – negotiations should be the way," Westerwelle said at a joint press conference with Fayyad.
"Germany supports a two-state solution. We support the Palestinian people in having an independent state."
German officials have already said publicly that they oppose the Palestinian plan to ask the United Nations for membership and recognition.
Development Minister Dirk Niebel, who is accompanying Westerwelle and was in Gaza on Tuesday, told Der Spiegel magazine last week that the trip would underline Berlin's reservations about the Palestinian plan.
"We must convince the Palestinians that a unilateral declaration of independence is the wrong way to go," he said.
He said the German ministers would instead advise the Palestinian leadership to present a resolution calling for a two-state solution with Israel based on the borders that existed before the 1967 Arab-Israeli war and mutually agreed land swaps, as proposed by US President Barack Obama.
France and other European countries have indicated they would recognise a Palestinian state while German Chancellor Angela Merkel has said she would not until a broader peace deal with Israel is agreed.
Westerwelle is scheduled to meet with his Israeli counterpart Avigdor Lieberman and Prime Minister Benjamin Netanyahu later on Tuesday.