The intervention came as Russia sided with Serbia in the stand-off with Kosovo, whose claim to statehood in 2008 was not recognised by Belgrade or Moscow.
The former officer from Kosovo's Serb minority, Dejan Pantic, was arrested on December 10 for allegedly assaulting a Kosovan agent.
Ethnic Serbs set up roadblocks near the border and this was followed by a series of shooting incidents.
Kosovo on Wednesday closed a border crossing due to what it called illegal blockades, while Serbia said the “protests” were “democratic and peaceful”.
Serbia said this week that its armed forces were at their highest level of combat readiness.
In a joint statement on Wednesday, the US and the EU said they were concerned by the “continued tense situation”.
The western powers called on Serbia and Kosovo to show “maximum restraint”, take steps to de-escalate and “refrain from provocations, threats or intimidation”.
“We also expect Kosovo and Serbia to return to fostering an environment conducive to reconciliation, regional stability and co-operation for the benefit of their citizens,” they said.
A spokeswoman for a court in Kosovo told Reuters that Mr Pantic would be moved from detention to house arrest.
His move to house arrest was requested by Kosovan prosecutors, the spokeswoman said.
Mr Pantic was one of many ethnic Serb police officers to hand in their police badges in a dispute over licence plates that helped ignite the latest tension.
Kosovo has meanwhile assured the US and the EU that it is not planning to round up ethnic Serbs involved in peaceful protests.
“At the same time, rule of law must be respected, and any form of violence is unacceptable and will not be tolerated,” the western allies said.
A Nato peacekeeping force called for dialogue, while Germany separately described the Serb blockades as illegal and accused Belgrade of “nationalist rhetoric”.
A foreign ministry spokesman in Berlin said Kosovo should work towards a form of self-governance for ethnic Serbs envisaged in a 2013 agreement.
Both Serbia and Kosovo aspire to EU membership, with Brussels taking a greater interest in the region following Russia's invasion of Ukraine.
Serbia has declined to impose sanctions on Russia over the war, while insisting it is not in Moscow's pocket.
Kremlin spokesman Dmitry Peskov said on Wednesday that “we support Belgrade in all the actions that are being taken”.
“Serbia is a sovereign country and it is fundamentally wrong to look for some kind of destructive influence of Russia here,” he said.