how can H2O and ethanol be separated
Starting with 50% ethanol/50% water, one can use fractional distillation to provide about 96% ethanol/4% water but that's the best you can do due to the formation of an azeotrope at that point. Benzene can be added as a desiccant and that messes up the azeotrope and allows "pure" ethanol to be obtained BUT it contains small amounts of benzene. You can read more about it here.
http://en.wikipedia.org/wiki/Ethanol