Does this mean only in a physical sense, or can it also mean that he is an obstacle in the relationship between me an you?
Certainly not in English. It's a mistake commonly made by those trying to overcompensate for colloquial use of "me" instead of "I" in the nominative case:
"- Who's there?
- It's me." (Technically, it should be "I")
Think of "I" vs "me" (along with he/him, she/her, they/them and who/whom) as the last vestiges of cases in English, with I/he/she/they/who being strictly nominative. A very simple way of checking yourself: in all instances where you would use "him" instead of "he", you also must use "me" instead of "I". (For some reasons people make far fewer mistakes with "he" vs "him" than they do with "I" vs "me".)
"zwischen" is a two-way preposition.
no motion: dative (mir/dir/ihm/ihr/uns/euch/ihnen)
motion: accusative (mich/dich/ihn/sie/uns/euch/sie)
I tried "me and you" - just comes so much more naturally to me (deeeeep southern accent over here) - and got it wrong. Oh well, I'll pay closer attention next time.
Just checked and saw that "He stands between you and I" is accepted! No! Man, c'mon, that ain't fair! Check it -
"The ice cream vendor gives you and I ice cream."
Try to take the 'and you' out -
"The ice cream vendor gives I ice cream."
See how silly that sounds? Because the vendor is the subject. No 'I' need be involved in this sentence, just 'me' - or, better yet, relax a bit and just say 'us', avoid the confusion all together.
Is saying "in between" incorrect. That may only be colloquially used in English.
I believe "in between A and B" is incorrect. You can use "in between" if you don't follow it with "A and B" (e.g., they have been mentioned in the previous sentence or otherwise obvious from the context). Otherwise it's "between A and B".
Hi That would be because "in between" is an adverb. http://www.dailywritingtips.com/between-vs-in-between/
I think "it stands between you and me" should also be accepted. "Wo steht der Baum? Er steht zwischen dir und mir". You wouldn't say "he" in English.
In other words you cannot use "in between" in combinations like "in between X and Y" - that would have to be "between X and Y".
"In between" is used by itself: I got caught in between.