"We believe that sanctions remain important as part of our policy, but by themselves they have not produced the results that had been hoped for," Clinton said on the sidelines of the UN General Assembly in New York on Wednesday.
She repeated US demands that Myanmar's rulers immediately release Suu Kyi, jailed for most of the past 20 years, embark on credible democratic reform and engage in dialogue with the opposition and ethnic minorities.
Clinton had raised expectations earlier this year that Washington might be rethinking its economic sanctions against Myanmar, also known as Burma.
But she said: "Engagement versus sanctions is a false choice, in our opinion, so going forward we will be employing both of those tools, pursuing our same goals."
Clinton also stressed Washington's desire to deal with country's military rulers.
"To help achieve democratic reform, we will be engaging directly with Burmese authorities," she said.
Welcoming the US policy shift, Zaw Oo, a professor at Thailand's Chiang Mai University, told Al Jazeera: "The sanctions are not sufficient to promote democracy in Burma. They are becoming less effective.
'Holding to power'
"The US engagement will provide further assistance so that these weakening civil-society elements will be re-energised and be prepared for the eventual changes in the country.
"It might also lead [Myanmar's] armed forces to reconsider their relationship with China in strategic terms."
The ruling generals in Myanmar have announced plans to hold the country's first election in two decades next year as part of its "road map" to democracy.
Critics, however, say the exercise is merely an attempt to hold on to power and lend legitimacy to nearly five decades of military rule.
The US joined the international community in condemning Myanmar's government earlier this year for convicting Suu Kyi for allowing an American man to intrude into her home and stay for two days.
The Nobel Peace Prize winner, who has spent 14 of the past 20 years in jail or under house arrest, was sentenced in August to a further 18 months of house arrest, enough to keep her off the campaign trail for next year's planned elections.