Kerry made the remarks after a meeting with acting Palestinian Authority (PA) chief Mahmoud Abbas in Bethlehem in the West Bank on Wednesday.
"Let me emphasize that the position of the United States is that we consider now, and have always considered, the settlements to be illegitimate," he said.
"I want to make it extremely clear that at no time did the Palestinians in any way agree, as a matter of going back to the talks, that they could somehow condone or accept the settlements," Kerry added.
Palestinian and Israeli negotiators began a fresh round of talks in July.
Last Palestinian-Israeli talks had broken down in September 2010 after Tel Aviv refused to freeze its settlement activities in the occupied West Bank.
A senior PA official said on Tuesday that there will be no direct talks with Israel if it keeps on expanding illegal settlements in the occupied West Bank.
"The Israeli side is determined to continue its settlement and we cannot continue negotiations under these unprecedented settlement attacks," said the official, who spoke on condition of anonymity, following a meeting between Israeli and Palestinian negotiators.
Earlier in the day, Abbas described Israel’s settlement activities as damaging to the so-called peace talks.
Earlier this month, a large number of Palestinians from different political movements took to the streets of the West Bank city of Ramallah to call on the PA to pull out from the talks with Israel.
Supporters of all Palestinian factions, including the Islamic resistance movement Hamas and the Popular Front for the Liberation of Palestine, gathered in central Arafat square to protest against the talks.
The protesters said the talks are useless and Abbas must withdraw from the negotiations.
They also demanded the PA take the regime in Tel Aviv to the International Criminal Court for its crimes against the people of Palestine.
The presence and continued expansion of Israeli settlements in occupied Palestine has created a major obstacle for the efforts to establish peace in the Middle East.
The Israeli regime has recently announced plans to build about 5,000 more illegal settlement units on the occupied Palestinian land.
More than half a million Israelis live in over 120 illegal settlements built since Israel’s occupation of the Palestinian territories of the West Bank and East al-Quds in 1967.
The United Nations and most countries regard the Israeli settlements as illegal because the territories were captured by Israel in a war in 1967 and are hence subject to the Geneva Conventions, which forbids construction on occupied lands.
