In a major speech setting out his vision of a solution to the conflict, Kerry warned Israel was on a course leading to a "perpetual occupation" of Palestinian-owned land.
"Today, there are a similar number of Jews and Palestinians living between the Jordan River and the Mediterranean Sea," he told an audience of diplomats in Washington.
"They have a choice. They can choose to live together in one state, or they can separate into two states," he said.
Explaining the US decision last week not to veto a UN Security Council vote to condemn Israeli settlement building, Kerry said: "The vote in the UN was about preserving the two-state solution.
"That's what we were standing up for: Israel's future as a Jewish and democratic state, living side by side in peace and security with its neighbors," he said.
"The two-state solution is the only way to achieve a just and lasting peace between Israelis and Palestinians," Kerry said, warning that such a solution was now in "serious jeopardy.
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