Eric Holder argued that using lethal military force against an American in his home country would be legal and justified in an "extraordinary circumstance" comparable to the September 11 terrorist attacks.
"The president could conceivably have no choice but to authorise the military to use such force if necessary to protect the homeland," Mr Holder said.
His statement was described as "more than frightening" by Senator Rand Paul, a Republican from Kentucky, who had demanded to know the Obama administration's position on the subject.
"It is an affront the constitutional due process rights of all Americans," said Mr Paul, a 50-year-old favourite of the anti-government Tea Party movement, who is expected to run for president in 2016.
Mr Holder wrote to Mr Paul after the senator threatened to block the appointment of John Brennan as the director of the CIA unless he received answers to a series of questions on its activities.
Mr Paul on Wednesday evening took to the floor of the Senate to launch an old-fashioned filibuster in an effort to delay a vote on the approval of Mr Brennan for CIA director. “I won’t be able to speak forever, but I’m going to speak as long as I can,” he said, before embarking on several hours of criticism of Mr Obama's compliance with the US constitution.
Mr Obama has been sharply criticised for the secrecy surrounding his extension of America's "targeted killing" campaign against al-Qaeda terrorist suspects using missile strikes by unmanned drones.
The secret campaign has killed an estimated 4,700 people in Pakistan, Yemen and Somalia. A quarter are estimated to have been civilians prompting anger among human rights campaigners.
According to research by the Bureau of Investigative Journalism, drone strikes killed between 474 and 881 civilians – including 176 children – in Pakistan between 2004 and last year.
Criticism within the US has focused on the implications for terror suspects who are also US citizens, after Anwar al-Awlaki, a radical cleric born and educated in the US, was killed in Yemen in 2011.
The administration claims it has the legal authority to assassinate Americans provided that they are a senior al-Qaeda operative posing an imminent threat and it would be "infeasible" to capture them.
This justification emerged only last month in a leaked memo from Mr Holder's department of justice. Mr Obama this week agreed to give Congress his full set of classified legal memos on the targeting of Americans.
Civil liberties campaigners accuse the president and his aides of awarding themselves sweeping powers to deny Americans their constitutional rights without oversight from Congress or the judiciary.
Mr Holder stressed in his letter that the prospect of a president considering the assassination of an American citizen on US soil was "entirely hypothetical" and "unlikely to occur".
Yet "it is possible, I suppose, to imagine an extraordinary circumstance in which it would be necessary and appropriate under the constitution and applicable laws of the United States for the president to authorise the military to use lethal force within the territory of the United States," he wrote.
Appearing in front the Senate judiciary committee on Wednesday, Mr Holder reiterated that "the government has no intention to carry out any drone strikes in the United States".
Senator Chuck Grassley, a Republican from Iowa, told him his reference to "extraordinary circumstances" such as September 11 or the 1941 bombing of Pearl Harbour were "extremely concerning".
"It is imperative that we understand the operational boundaries for use of such force," Mr Grassley said. "American citizens have a right to understand when their life can be taken by their government absent due process."