Secretary of State Mike Pompeo is touring a Jewish settlement in the Israeli-occupied West Bank, marking the first such visit by a top US official.
The trip to Psagot comes a year after Mr Pompeo said the settlements did not contradict international law, reversing a long-held US position.
The declaration outraged Palestinians, who oppose settlements on land they claim for a future independent state.
Mr Pompeo will later pay a similar visit to the occupied Golan Heights.
President Donald Trump last year officially recognised Israeli sovereignty over the strategic plateau, which Israel seized from Syria in the 1967 Middle East war and annexed in 1981.
Mr Pompeo arrived in Israel on Wednesday for what is likely to be his last trip to Israel before leaving office in January.
On Thursday morning, he held talks with Israeli Prime Minister Benjamin Netanyahu in Jerusalem.
At a joint news conference, Mr Pompeo announced that the state department would declare as anti-Semitic the global Boycott, Divestment and Sanctions (BDS) movement, which campaigns for a complete boycott of Israel over its policies towards the Palestinians.
"We will immediately take steps to identify organisations that engage in hateful BDS conduct and withdraw US government support for such groups," he said.
Israel says that BDS opposes the country's very existence and is motivated by anti-Semitism - BDS rejects the charge, saying Israel is using it as a cover for its actions.
Mr Pompeo then travelled to the Psagot winery in a Jewish settlement close to Ramallah - where a wine has already been named in his honour.
The visit comes a year after he said that settlements were "not, per se, inconsistent with international law", breaking from decades of US foreign policy.
"For a long time the state department took the wrong view of settlements. It took a view that didn't recognise the history of this special place and instead now today the United States department of state stands strongly to the recognition that settlements can be done in a way that's lawful and appropriate and proper," Mr Pompeo told reporters in Jerusalem.
More than 600,000 Jews live in about 140 settlements built since Israel's occupation of the West Bank and East Jerusalem in the 1967 Middle East war. Most of the international community considers the settlements illegal under international law, though Israel disputes this.
Palestinian leaders warned last week that visit by the top US diplomat to the Psagot winery would be a provocation and set a dangerous precedent.
There have already been protests. On Wednesday, dozens of Palestinians demonstrated in al-Bireh, a community between Jerusalem and Ramallah.
President-elect Joe Biden is expected to reverse Mr Pompeo's declaration on settlements, but he has said he will not undo Mr Trump's decision in 2017 to recognise of Jerusalem as Israel's capital.
Mr Pompeo will also go to the Israeli-occupied Golan Heights on Thursday.
"The simple recognition of this as part of Israel... was a decision President Trump made that is historically important and simply a recognition of the reality," he said.
Syria said last year that Mr Trump's decision was "a blatant attack on its sovereignty".
Israel's annexation of the Golan has not been recognised by the rest of the international community, and Syria demands the return of the territory. It called Mr Trump's declaration "a blatant attack on its sovereignty".
