The Twin-Otter aircraft belonging to Tara Air went missing minutes after it took off from Pokhara airport on way to Jomsom.
Pokhara is a resort town some 200 kilometres west of the capital Kathmandu. Jomsom, a short distance further north, is the starting point for many people trekking in the Himalayas.
There were 23 people, including three crew members, two children and two foreigners, on board, officials said.
One passenger was later confirmed to be from China and another a Kuwaiti national. All the others were from Nepal and two were children.
The aircraft might have crashed in Dana village which lies between Mustang and Myagdi district in northern Nepal, a police officer from Pokhara Zonal Police office quoted local residents as saying.
Three helicopters have been dispatched from Kathmandu for search operations and Nepal Army, Armed Police Force and Nepal Police personnel were mobilised for the same purpose.
"We have dispatched three helicopters on a search and rescue mission," the airline said in a statement posted on its website.
"The weather at both origin and destination airports was favourable and the airport cleared for departure by the control tower at Pokhara," said the statement.
The cause of the incident could not be immediately known. However, Dana Village Development Committee and adjoining areas were enshrouded in cloud of dust on Tuesday following dry landslides in Mount Annapurna.
Local residents said they have heard a huge sound of explosion and fire in the remote mountainous area.
Since 1949 -- the year the first aircraft landed in Nepal -- there have been more than 70 different crashes involving planes and helicopters, in which more than 700 people have been killed. In 2013, the European Union banned all Nepalese airlines from flying there.
In 2014, a Nepal Airlines plane crashed into the side of a snow-clad mountain in the country's west, killing 18 people.
Picture for representation only.
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