In a statement issued on Tuesday at annual "association council" talks with Israeli Foreign Minister Silvan Shalom, the EU has also condemned an Israeli ban on contacts with officials who hold talks with Palestinian leader Yasir Arafat.
Shalom meanwhile said Israeli Prime Minister Ariel Sharon was due soon to resume top-level contacts with the Palestinians, by meeting his counterpart Ahmad Quraya in the coming days.
"We think we are going to have this meeting. It wasn't set up exactly but (it will be) in the next, coming week," he said after talks with Powell at a Brussels hotel.
Official contacts have been frozen for nearly three months amid continuing violence.
The EU said the barrier, which Israel says is necessary to keep out bombers, would undermine international efforts to resolve the conflict by creating a Palestinian state living in peace with its Jewish neighbour.
"It would cause further humanitarian and economic hardship to the Palestinians," the EU statement said.
"Thousands of Palestinians west of the fence are being cut off from essential services in the West Bank, Palestinians east of the fence will lose access to land and water resources," it said.
Palestinians and Israelis protest
against the controversial barrier
"Hence, the EU calls on Israel to stop and reverse the construction of the so-called security fence inside the occupied Palestinian territories."
The EU said the building and expansion of Jewish settlements in the West Bank "inflames an already volatile solution", and said there was "no alternative" to a peace plan backed by the EU, the United States, the United Nations and Russia.