The Foreign Ministers attending the meeting in Naples issued a statement saying that Palestinian resistance groups and hardline Israeli policies were "dooming the peace process."
Israel was also warned by ministers that the sharply deteriorating humanitarian situation in the West Bank and Gaza was "fuelling terrorism".
The EU and Arab delegations critisised Israel's decision to construct the 650 kilometre long ''security'' wall, snaking its way across the West Bank. Israel claims that the wall is needed to prevent Palestinians from carrying out attacks inside Israel.
The Palestinians say that the wall is just one more example of
Israel trying to push Palestinians off their land and further restrict their movements.
Italian Foreign minister Franco Frattini told reporters that the issue of the wall had been brought up in discussions and Israel was warned not to erect the barrier on Palestinian land.
"We pointed to the need for the security barrier not to invade Palestinian territory", he said.
The EU also announced steps to narrow the Arab-Israeli divide and to encourage a better understanding between both sides.
A Euro-Mediterranean parliamentary assembly and a Euro-Mediterranean Foundation has been established to debate how the Middle East can shed its "clash of cultures" syndrome.
Initiatives will be undertaken to encourage Arab-Israeli education projects and exchanges of experts in the fields of science and arts.
Meanwhile Israel's Foreign Minister Silvan Shalom held talks with his Egyptian counterpart Ahmad Mahir on Wednesday.
Their talks led to an impromptu meeting between Shalom and Palestinian Foreign Minister Nabil Shaath, who arrived for his own meeting with Mahir.
In their discussions, Shalom said Egypt was playing an "important role" in the peace process, but said that role could be strengthened once Egypt sent its ambassador back to Israel. Cairo recalled its ambassador to Israel three years ago at the beginning of the second Palestinian Intifada (uprising)
Shalom was supportive of Egypt's understanding of his country's position, but vented frustration at Egypt's pattern of voting in United Nations resolutions relating to Israel.
"He said it was impossible that a country which has signed peace agreements with Israel should always vote against it in
an international forum," said an Israeli spokesman.