"The fence aims to block cars from entering tourist areas except from four designated points and thus prevent possible terror attacks," a security official said on condition of anonymity on Monday.
The fence would span 20km, stand one and a half metres high, and be patrolled by security forces, the official said.
He added that work started on Saturday but did not say when it would end.
Once the fence is complete, access to the city will be restricted to police-monitored entry points, equipped with state-of-the-art explosive-detection equipment, he said.
The opposition newspaper Al-Wafd put the fence price tag at 20 million Egyptian pounds ($3.5 million) but did not say how it obtained the figure.
"How is Egypt different from the government of (Israeli Prime Minister Ariel Sharon) that built a separation wall to stop the Palestinian resistance?" it wrote on its front page.
"This wall seeks to keep Sinai Bedouins out of Sharm al-Shaikh but it will only separate the state from its citizens ... it will not prevent terrorism, it will increase it," it said.
"How is Egypt different from the government of (Israeli Prime Minister Ariel Sharon) that built a separation wall to stop the Palestinian resistance?"
Al-Wafd, Egyptian opposition newspaper
The security official insisted that the fence "is not meant to stop any particular group of people but prevent terrorist attacks".
The July suicide attacks in Sharm al-Shaikh killed about 70 people in Egypt's worst terror attack.
Last year, another spate of bombings hit Taba near the border with Israel and left 34 people dead, among them Israelis.