The EU should have a much more central role in foreign and security policy, the Liberal Democrats say.
Sir Menzies said the EU could be 'a midwife' in the Mid-East
Sir Menzies Campbell, in his first major foreign policy speech as party leader, said the EU could play a vital part in brokering a Middle East peace.
However, he said he wanted fewer laws to originate from Brussels.
Sir Menzies also called for Britain to "rediscover its independence of thought" by "rebalancing" its relationship with the US.
"Britain should distinguish its own foreign policy from that of the United States," he said.
"It should rediscover its independence of thought. We should all value our relationship with the United States but the relationship needs to be rebalanced, redesigned and renewed."
Sir Menzies likened the role the EU could play in the Middle East to that of a midwife.
"For both historical and current reasons the United States comes to the table with an umbilical link to Israel," he said.
"An honest midwife is necessary if a settlement of the conflict between Israel and the Palestinians is to be delivered.
"The EU could be that midwife. It's impartiality is not perfect in the eyes of either of the parties to the dispute but it is better than anything anyone else can offer.
"Europe is needed more than ever."
He said the focus of EU legislation needed to change, praising European Commission president Josť Manuel Barroso's moves towards better regulation.
"The EU would better reflect its peoples' priorities if it stuck to legislating only where necessary," Sir Menzies added.
Mr Barroso "aims to simplify regulation and reduce administrative burdens significantly, not least by repealing unhelpful legislation.
"These are welcome steps, but the EU should be willing to go even further in that direction."
Sir Menzies also said there was "no enthusiasm" for an EU constitution of the type rejected in referenda in France and the Netherlands last year.
The Lib Dem leader described it as a "tortured document".
The constitution is currently on hold. It cannot come into force unless all 25 members states have ratified it. The UK has put ratification on hold.