He said it was important to be "practical and realistic about what can be accomplished in certain periods of time".
Speaking after talks in the West Bank city of Ramallah with Palestinian leader Yasser Arafat, Mr Powell said "There will be a need for monitors, observers, to see what is happening on the ground, and make an independent observation of what has happened".
Palestinians have been pushing for such a force since the outbreak of violence nine months ago, but Israel opposes any significant foreign presence.
But a White House spokesman in Washington denied that Mr Powell was embracing the Palestinian proposal.
The statement "is not an endorsement of what the Palestinians have said," the spokesman, Ari Fleischer said. "There is no change in the United States' position," he added.
Call for progress
Mr Powell held discussions with Israeli Foreign Minister Shimon Peres in the morning before meeting Mr Arafat, and is due to see Israeli Prime Minister Ariel Sharon on Thursday evening.
After his meeting with Mr Peres, the US Secretary of State said Israel and the Palestinians must "move as quickly as possible" towards final status negotiations.
He said it was important to be "practical and realistic about what can be accomplished in certain periods of time".
Mr Peres, a dove in Israeli politics, said the Palestinians had not yet taken enough measures to halt the violence, but avoided blaming Mr Arafat.
Violence resumed on Thursday, when a Palestinian gunman shot dead a Jewish woman settler and wounded another in the West Bank.
A Palestinian worker was also reportedly shot and wounded by Israeli troops in the Gaza Strip.
Palestinian leaders now want to move quickly to confidence-building measures, including a freeze on Israeli settlements, but Mr Sharon insists there must first be a complete end to Palestinian violence.
Even-handed
In his remarks, Mr Powell appeared to support the Israeli demand for a period of calm before a return to the negotiating table.
He also insisted on the importance of "all the confidence-building measures" recommended by the Mitchell report - presumably a reference to Israeli settlement-building activity.
"At the end of the day it's Mr Sharon who will make that judgement," Mr Powell said.
In a BBC interview, the Palestinian minister for international co-operation, Nabil Shaath, accused the Israelis of trying to sabotage the Mitchell plan.
Differences
But he also said he believed the US was now getting more involved in the peace process and would not allow Israel to dictate the pace.
On Thursday, Mr Peres reiterated Israel's support for "the Mitchell plan as a whole".
He said Israel would fulfil its obligations and it expected the Palestinians to do the same.
Differences emerged between Mr Sharon and with President Bush at the White House on Tuesday.
"On the settlement question, the American position is different from ours - that's legitimate and does no harm to our relations," Mr Sharon told reporters.