Kerry accused Prime Minister Benjamin Netanyahu's government of allowing Israel to slide towards a "perpetual occupation."
In a stern parting shot, US Secretary of State John Kerry warned Israel on Wednesday that building settlements on Palestinian land threatens the country's very future as a democracy.
Less than four weeks before President Barack Obama leaves office, Kerry accused Prime Minister Benjamin Netanyahu's government of allowing Israel to slide towards a "perpetual occupation."
With President-elect Donald Trump taking office on January 20, and already urging Israel to "stand strong" in the face of international pressure, it was not clear what impact Kerry hopes to have on the peace process.
But his comprehensive and at times angry speech laid down parameters for a peace deal -- two states within their pre-1967 frontiers and with a shared capital in Jerusalem -- that he hopes will outlast Obama.
Washington officials have refused to say what they might do next, but Israel fears the administration could attempt to codify these principles in a UN resolution or statement by the Middle East diplomatic quartet.
And they were quick to reject Kerry's rebuke, which Netanyahu said showed that Washington's chief diplomat was biased towards the Palestinian cause.
"For over an hour, Kerry obsessively dealt with settlements and barely touched upon the root of the conflict -- Palestinian opposition to a Jewish state in any boundaries," he complained.
Kerry's speech did not depart from US policy of many years, nor from his warnings in recent months, but critical and supportive observers alike noted his detailed breakdown of the problem as he sees it.
"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.
"They have a choice. They can choose to live together in one state, or they can separate into two states.
"But here is a fundamental reality: if the choice is one state, Israel can either be Jewish or democratic -– it cannot be both -– and it won't ever really be at peace," he argued.
Kerry was speaking against the backdrop of a diplomatic firestorm that was triggered last week when, on Obama's instruction, US diplomats opted not to veto a UN Security Council resolution criticizing Israel, instead abstaining.
The resolution, backed unanimously by the rest of the 15 powers on the council, effectively declared Israel's settlements in areas of east Jerusalem and the West Bank beyond its 1967 border illegal.
Kerry said that the resolution was allowed to pass as a warning that Israeli settlements are harming efforts to revive peace talks, not in an effort to prejudge the final status of territory.
But, in welcoming Kerry's speech, Palestinian president Mahmud Abbas made it clear that he regards the resolution, UNSC 2334, as an element of international law that would underpin future negotiations.
In a statement, Abbas said the Palestinians are ready to resume talks "the minute the Israeli government agrees to cease all settlement activities... on the basis of international law... including UNSC 2334."
Netanyahu, whose right-wing coalition is backed by the settler movement and who has insisted the home building is no threat to peace, was furious and accused Obama and Kerry of orchestrating the Security Council vote.
Trump, who has picked a future US ambassador to Israel who strongly supports settlement building, was also angered, tweeting: "We cannot continue to let Israel be treated with such total disdain and disrespect."
But Kerry was undeterred, insisting the US could not "in good conscience" have vetoed a resolution it broadly agrees with, and piling on more criticism of Israel in his landmark speech.
"The vote in the UN was about preserving the two-state solution," he declared.
"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," Kerry said, warning that such a solution is now in "serious jeopardy."
Kerry warned the "settler agenda" was leading Israeli policy and imperiling prospects for peace.
"Trends indicate a comprehensive effort to take West Bank land for Israel and prevent any Palestinian development there," he said.
And Kerry added: "The settler agenda is defining the future in Israel. And their stated purpose is clear: They believe in one state: greater Israel."
Already, last week's decision to allow the UN resolution to pass has angered Israel's many supporters in Washington, including both Democratic and Republican lawmakers and major Jewish American lobby groups.
The speech did nothing to appease their concern, and some observers questioned its "curious" timing.
"A speech of this gravity really should have been delivered before such a permanent move as the Security Council resolution, rather than after," scholar Jonathan Schanzer told AFP.
Schanzer, vice president of the Foundation for Defense of Democracies, argued that Israel should have been given time to respond to Kerry's complaints before being ambushed at the United Nations.
Ilan Goldenberg of the Center for a New American Security was more supportive of Kerry's goals in the speech, but he also noted: "It would have been better two years ago."
Kerry, he suggested, was attempting to lay down the framework for a peace process that might bear fruit before Trump arrives in office and radically changes the US position.