No, Dropbox does NOT encrypt your data on the client site.
Alternatives would be Spideroak and Wuala or addon software like Boxcryptor. They work but not as flawlessly and user-friendly as Dropbox usually does …
Please be cautious: EncFS was not designed to resist an attacker having ongoing access to the volume, as they would in this scenario!
In particular, an attacker having access to the ciphertext at two or more different times violates EncFS's security assumptions; undetected malicious modification of files is also feasible in this scenario.
Many encrypted filesystems do not include such a property in their design criteria - for example, XTS mode as-is is not suitable for use in this scenario either, so please also try to avoid putting TrueCrypt (et al) on Dropbox!
For a broad general example of what a system would look like which tries to address this use case more naturally and effectively (although, caveat: I have not reviewed it in great detail myself), please see Tahoe-LAFS.
I've been using Dropbox with EncFS, and I feel foolish about not thinking of the fact that Dropbox has ongoing access to the encrypted files.
Would you recommend something other than Dropbox + EncFS as the best compromise for a file-sync solution that has reasonable security, a non-buggy client, supports block-level sync, is reasonably priced and "just works"? BitTorrent Sync + EncFS?
Damn! What's the vulnerability? Do they reuse IVs or something? No wonder I got stuck when designing my own encrypted filesystem, I didn't have this assumption. On the plus side, mine was safer. I'll have to revisit it.
Alternatives would be Spideroak and Wuala or addon software like Boxcryptor. They work but not as flawlessly and user-friendly as Dropbox usually does …