Mr Kerry delivered his assessment yesterday after four days of shuttling between the sides.
Mr Kerry said he was impressed with the “serious commitment” by both sides to resume talks, which broke down nearly five years ago.
“I know progress when I see it, and we are making progress,” Mr Kerry said.
He said he would leave a team of experts in the region to continue efforts and he plans on returning soon.
Mr Kerry’s final, frantic day of diplomacy included a late-night meeting with Israeli Prime Minister Benjamin Netanyahu and a last-minute meeting in the West Bank with Palestinian President Mahmoud Abbas.
The talks are aimed at establishing an independent Palestinian state alongside Israel as part of a final peace deal.
Mr Kerry has been shuttling between the sides since taking office early this year in search of a formula for restarting negotiations, which broke down in 2008. This was his fifth trip to the region.
In the past, Mr Abbas has said he will not negotiate unless Israel stops building settlements on war-won lands or accepts its 1967 lines – before the capture of the West Bank, Gaza Strip and east Jerusalem in a war that year – as a starting point for border talks. The Palestinians claim all three areas for their future state.
The Palestinians are also pushing Israel to release some of the thousands of Palestinian prisoners it is holding as a goodwill gesture. Mr Netanyahu has insisted that talks begin immediately without any preconditions.
Mr Kerry said his meeting with Mr Netanyahu stretched until nearly 4am. Addressing his Cabinet yesterday, Mr Netanyahu showed few signs of changing his positions. “We will not compromise on security and there will be no agreement that will endanger Israelis’ security,” he said.