The strong comments from the secretary of state, in Asia for his first foray into crisis management, appear to signal a sea change in American policy towards the isolated country.
Tillerson's tour comes after a missile launch last week that Pyongyang described as a drill for an attack on US bases in Japan.
The US has 28,000 troops stationed in South Korea to defend it from the North, but the capital Seoul is within range of Pyongyang's artillery and analysts believe any conflict could risk rapid escalation and heavy casualties.
Under that policy, the US ruled out engaging the North until it made a tangible commitment to denuclearisation, hoping that internal stresses in the isolated country would bring about change.
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"We are exploring a new range of diplomatic, security, economic measures. All options are on the table," Tillerson told reporters at a joint press conference with his South Korean counterpart Yun Byung-Se.
"Certainly we do not want to, for things to get to military conflict," he said. "If they elevate the threat of their weapons programme to a level that we believe require action, then, that option's on the table."
Four more test blasts have followed, two of them last year.
Tillerson's remarks came a day after he said in Tokyo that 20 years of efforts to denuclearise the North had "failed" and promised a new approach, without giving specifics.
The United Nations has imposed multiple sets of sanctions on the North over its nuclear and missile programmes, but its main diplomatic protector and trade partner China is accused of not fully enforcing them.
"I don't believe we have ever fully achieved the maximum level of action that can be taken under the UN security council resolution with full participation of all countries," he said.
"We know that other nations can take actions."
Beijing shares US concerns over Pyongyang's attempts to build an arsenal of nuclear devices, but has also blamed Washington for escalating tensions.
The issue is also made more complicated by the deployment of the US Terminal High Altitude Area Defense (THAAD) anti-missile system to South Korea.