MANILA—China and the Philippines must settle their territorial dispute over the South China Sea through diplomacy, not "coercion or a threat of force," U.S. Secretary of State John Kerry said Wednesday.

Mr. Kerry said all claimants to the disputed waters and islands in the South China Sea must recognize this month's ruling by a United Nations-backed arbitration panel—which rejected China's sweeping maritime claim, enraging Beijing—"is legally binding and that we expect the parties to comply with their obligations under the law."

He also urged the claimant countries to "exercise restraint and to work to reduce tension" in the South China Sea. "We hope to see a real opportunity for claimants to work together constructively, peacefully and ultimately resolve their difference consistent with international law," he said. "We hope to see a process that will narrow the geographic scope of the maritime dispute, set standard of behavior."

In a case brought by the Philippines, a tribunal of the Permanent Court of Arbitration in The Hague on July 12 concluded China's claims to nearly all of the South China Sea had no legal basis. The Philippines and four other Southeast Asian governments also claim territorial or usage rights in the strategic waters, which are home to rich fisheries and oil-and-gas reserves, and carry some $5 trillion in trade each year.

China didn't take part in the tribunal, which it said had no jurisdiction on the case, and Chinese officials immediately reiterated that Beijing wouldn't comply with the ruling.

Philippine Foreign Affairs Secretary Perfecto Yasay, who spoke at Wednesday's briefing in Manila alongside Mr. Kerry, said the Philippines is ready to negotiate with China, and has named former president Fidel Ramos, a respected statesman in Asia, as special envoy to settle the sea dispute.

"We would hope this would be pursued as soon as possible," said Mr. Yasay, whose responses to the tribunal's verdict have so far been kept low-key to avoid antagonizing China. "We are hoping that China will come up with a position that will allow these bilateral talks to proceed."

Mr. Yasay said negotiations with China must be undertaken "within the ambit of international law and the 1982 UNCLOS," referring to the United Nations Convention on the Law of the Sea that underpins the tribunal's ruling.

Mr. Kerry said that while the U.S. is urging negotiations, it understands that "our friend and ally, the Philippines, can only do so on terms that are acceptable to the government of the Philippines."

Recently elected Philippine President Rodrigo Duterte also met with Mr. Kerry later Wednesday, but presidential spokesman Ernesto Abella said the pair didn't strike any deals on how to handle the South China Sea issue.

"There were no agreements regarding that, except that the president did mention that whatever talks we will engage in will begin with the ruling. That will be the foundation, " Mr. Abella said. He said that despite the polar views of the Philippines and China on the ruling, it couldn't be considered a "stalemate" and that "the conversation will continue."

In the wake of the tribunal ruling, fears of militarization in the area grew as China announced long-range bomber flights to distant islands and new naval drills, while the U.S. said it would continue sailing and flying through the region. However, recent developments suggest China and the U.S. are looking to reduce tensions in the region.

Mr. Kerry traveled to Manila from Laos, where he attended a meeting of foreign ministers from the 10-member Association of Southeast Asian Nations and other countries, including China. Divisions over China's territorial claims and activities dominated discussions, but the group did manage to form a united position, stressing the importance of international law in resolving conflicts.

In a meeting Monday with China, Asean agreed to a statement that both parties would further work out a code of conduct in the waters—a discussion that has languished for more than a decade—suggesting a softening of China's initial reaction to the ruling. Diplomats who attended the gathering in Laos also noted China has dropped mentions of its "nine-dash line" territorial demarcation of the South China Sea in recent statements.

On Wednesday, Mr. Duterte will convene the Philippines' National Security Council, which includes past leaders of the country, to provide guidelines for Mr. Ramos during any negotiations.

Write to Cris Larano at cris.larano@wsj.com

(END) Dow Jones Newswires

July 27, 2016 04:05 ET (08:05 GMT)