The US secretary of state sounded the warning on Wednesday in a final plea outlining the outgoing Obama administration's vision for peace between Israel and Palestine.
"The settler agenda is defining the future in Israel. And their stated purpose is clear: They believe in one state: Greater Israel," Kerry said.
The speech in Washington DC comes just days after the US decided to abstain from a UN vote to halt all Israeli settlement activity in the occupied West Bank and East Jerusalem.
By declining to use its veto at the Security Council, the US enabled the adoption of the first UN resolution since 1979 to condemn Israel over its settlements policy.
The settlements are considered illegal under international law, built on Palestinian land that some see as part of a future state with East Jerusalem as the capital.
There are close to 600,000 Israeli citizens living in Jewish-only housing settlements across the West Bank, and at least 200,000 in East Jerusalem, according to the Israeli human rights watchdog B'tselem.
Kerry defended the US decision to abstain from the vote, saying they voted "in accordance with our [US] values" and conscience.
"No one thinking seriously about peace can ignore the reality of the threat settlements pose to peace," Kerry said.
"The problem goes well beyond just settlements. Trends indicate a comprehensive effort to take West Bank land for Israel and prevent any Palestinian development there."
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