Watch John Kerry’s speech on a two-state solution for Israel and Palestine

US Secretary of State John Kerry insisted Wednesday that Israel and a future Palestine should live as two states based on the territory they held before the 1967 Six Day War.

Kerry, in a major speech on the frozen Middle East peace process, said "equivalent swaps" of land could happen to modify the border, but only by mutual consent.

Jerusalem, he argued, should be recognized as the capital of both states and those countries that do not recognize Israel as a Jewish state should do so.

"It is up to Israelis and Palestinians to make the difficult choices for peace but we can all help," he said, laying out the United States recommendations for reviving the peace effort.

Watch video of the full speech here:

Kerry also warned that Israel's settlement building in the West Bank threatens both hope for peace with the Palestinians and the country's own future as a democracy.

Kerry sternly warned that 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.

"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."

In the final days of President Barack Obama's administration, and with Israel's government openly hostile to outside pressure, Kerry wants to leave his mark.

Obama and Kerry are clearly not ready to give up on the region yet, hoping a UN resolution demanding a halt to Israeli settlement building in Palestinian territory and the secretary of state's speech will save a moribund process.

Before Kerry took the podium, Israel delayed a vote on permits for hundreds of settler homes at Prime Minister Benjamin Netanyahu's request to avoid further conflict with Washington.

'Serious jeopardy'

Friday's UN Security Council resolution passed 14-0, with the United States abstaining. By declining to use its veto, Washington enabled the adoption of the first UN resolution since 1979 to condemn Israel over its settlement policy.

Netanyahu reacted furiously, accusing US President Barack Obama's administration of being behind the resolution and vowing not to abide by it.

Explaining the US decision, Kerry — who denied the US was the "driving force" behind the measure — 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."

Kerry warned the "settler agenda" was leading Israeli policy in the West Bank and imperiling prospects for peace.

"No one thinking seriously about peace can ignore the reality of the threat settlements pose to peace," Kerry said in a major speech on Middle East peace efforts.

"But 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."

Kerry added: "The settler agenda is defining the future in Israel. And their stated purpose is clear: They believe in one state: greater Israel."