The case comes ahead of World Court deliberations on the same issue later this month.
Hamoked Centre for the Defence of the Individual and the Association for Civil Rights in Israel are challenging the principle of building the barrier on occupied land and restrictions it imposes on Palestinians in the West Bank.
The barrier - a razor wire-tipped electronic fence in some places and a towering cement wall in others - has limited Palestinians' access to fields, schools and neighbouring villages, violating their human rights, the groups said.
Israel claims the barrier, much of which is still under construction, has already stopped bombers from reaching its cities. Palestinians call the project a grab for land they want for a future state.
"Indeed, the life of the Palestinians living along the seam line (pre-1967 war boundary with the West Bank) is not easy," the State's Attorney's Office said in a written response filed with the court and published in the Israeli media.
"The barrier is a flagrant violation of international law"
Referring to places where dozens have been killed in bombings, it said: "However, it must not be forgotten that life on Gaza Road in Jerusalem is not easy either. Nor is it easy to conduct a normal lifestyle in the Maxim or Matza restaurants in Haifa."
The petitioners went ahead with the case despite signals from the government on Sunday that it intends to shorten the barrier's route and cut out most of the loops around Jewish settlements in an effort to secure US support for the project.
Israeli political sources said the revised route would be presented to US officials due in Israel this week to hear Prime Minister Ariel Sharon's plan to separate unilaterally from the Palestinians if a US-backed peace "road map" fails.
Rights groups support Palestinian
objection to the barrier
The Haaretz newspaper quoted Sharon's chief of staff, Dov Weisglass, as saying he believed the final route would be 600km long, 100km shorter than the original approved by the government.
Palestinian cabinet minister Saib Uraiqat, responding to the news, urged Washington to press Israel to halt construction completely for the sake of the "road map" peace plan, which envisions an end to the conflict and creation of a Palestinian state by 2005.
The International Court of Justice, based in The Hague, is to open hearings on 23 February at the behest of the UN General Assembly. Any opinion it renders on the legality of the barrier will be non-binding.
Israel, the United States and the European Union have filed briefs with the World Court arguing it was not the proper forum to decide on the issue.
The Palestinian Authority said the court had full jurisdiction to rule on the barrier, calling the project a "flagrant violation of international law" aimed at sealing a permanent hold on land Israel has occupied since 1967.