Under the Staying Put initiative, which was made law through the Children and Families Act 2014, councils have a duty to support looked-after children who want to remain with their foster carer until they are 21.
But concerns have previously been raised that the scheme is being hindered by a lack of funding from central government to enable councils to cover the additional cost.
Fostering data published by Ofsted shows that the percentage of young people in foster care staying on after their 18th birthday dropped significantly from 2,190 young people in 2015/16 (54 per cent of those eligible) to 1,570 in 2016/17 (46 per cent of those eligible).
Within the 2016/17 figures, the proportion of young people living in local authority foster care who remained in a placement fell from 56 to 52 per cent, while the percentage in independent foster agency placements declined from 50 to 38 per cent.
Takeup is now at its lowest level since 2014, when the government introduced the legal duty. The decline means the levels of fostered young people staying on after 18 are now lower than in 2013, prior to the introduction of the duty.
Ofsted noted that the declining use of Staying Put has been attributed to a lack of information together with "a lack of clarity and consistency" in how the duty is implemented.
Melissa Green, director of operations at the Fostering Network, said: "We are extremely disappointed to see that the number of young people Staying Put has dropped this year.
"The Fostering Network was delighted when Staying Put came into being because of its positive impact on young people, but there are still major ongoing concerns about its implementation.
"These concerns appear to be backed up by this significant drop in numbers of young people who are Staying Put and must be addressed at a local and national level as a matter of urgency."
The Department for Education allocated a total of £42.4m for councils to cover the cost of Staying Put for the first three years of operation - £7.4m in 2014/15, then £14m in 2015/16, and £21m in 2016/17.
The figures released by Ofsted also show that the availability of foster placements failed to keep pace with the growth in the number of children in care during 2016/17. This was caused by fewer approved fostering placements being available.
The primary reasons for foster placements becoming unavailable was carers taking a break or a pending resignation. "This is a concern because fewer places being available has the potential to lead to children being placed further away or in placements that do not meet all of their needs," said Ofsted.
Ofsted said Staying Put had reduced capacity within the fostering system but this only accounted for eight per cent of unavailable placements.
The number of initial enquiries about becoming a foster carer increased 12 per cent in 2016/17, reversing the declines of the past two years. The increase in enquiries was driven entirely by independent fostering agencies.
However, independent fostering agencies proved less successful than local authorities at converting initial enquiries into applications. Local authorities converted 18 per cent of enquiries into applications while independent fostering agencies converted just eight per cent.
While applications to become foster carers grew nine per cent in 2016/17, the number that were approved declined from 57 to 49 per cent.
Overall there were 52,005 children and young people in fostering and 83,930 foster placements in England on 31 March 2017.