Mr Tillerson outlined the tougher strategy to confront North Korea's nuclear threat while visiting South Korea on his three-country tour of Asia.
He also closed the door on talks with Pyongyang unless it denuclearised and gave up its weapons of mass destruction.
When asked about the possibility of using military force, Mr Tillerson told a news conference in the South Korean capital: "All of the options are on the table".
He said the US did not want a military conflict, but if North Korea took actions that threatened South Korean forces or US forces, "that would be met with [an] appropriate response".
"If they elevate the threat of their weapons program to a level that we believe requires action, that option is on the table," he said.
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But Mr Tillerson said that by taking other steps, including sanctions, the US was hopeful that North Korea could be persuaded to take a different course before it reached that point.
Past US administrations have considered military force against North Korea over its development of nuclear weapons and ballistic missiles, but rarely has that option been expressed so explicitly.
North Korea has accelerated its weapons development, violating multiple UN Security Council resolutions and appearing undeterred by tough international sanctions.
It conducted two nuclear test explosions and 24 ballistic missile tests last year. Experts said it could have a nuclear-tipped missile capable of reaching the US within a few years.
State Department officials have described Mr Tillerson's trip as a "listening tour" as the administration seeks a coherent North Korea policy, well-coordinated with its Asian partners.
Central to the US review is China and its role in any bid to persuade Pyongyang to change course. China remains the North's most powerful ally.
Mr Tillerson will meet with top Chinese officials including President Xi Jinping in Beijing this weekend.