US President Barack Obama has hailed a "new chapter" in US relations with Cuba, announcing moves to normalise diplomatic and economic ties.
Mr Obama said Washington's current approach was "outdated" and the changes were the "most significant" in US policy towards Cuba in 50 years.
Cuban President Raul Castro said he welcomed the shift in a TV address.
The move includes the release of US contractor Alan Gross and three Cubans held in the US.
Wednesday's announcements follow more than a year of secret talks in Canada and at the Vatican, directly involving Pope Francis.
US-Cuba relations have remained frozen since the early 1960s, when the US broke off diplomatic relations and imposed a trade embargo after Cuba's revolution led to communism.
The US is looking to open an embassy in Havana in the coming months, Mr Obama said on Wednesday.
The plans set out in a White House statement also include:
- Reviewing the designation of Cuba as a state sponsor of terrorism
- Easing a travel ban for US citizens
- Easing financial restrictions
- Increasing telecommunications links
- Efforts to lift the 54-year-old trade embargo
Mr Castro said the changes were something Cuba had been pressing for for a long time.
"Ever since my election... I have reiterated on many occasions our preparedness to hold a respectful dialogue with the government of the United States based on sovereign equality," he said.
President Castro urged Washington to lift a trade and economic embargo imposed on the communist-run island - a move that can only be made by Congress.
Republican Senator Marco Rubio has criticised the new US policy, saying it would do nothing to address the issues of Cuba's political system and human rights record.
Analysis: BBC's Barbara Plett Usher in Washington
The release of Alan Gross was essential to any diplomatic breakthrough between the US and Cuba, but internal political changes in both countries had already created a climate where detente was conceivable.
In the US, demographic shifts in Miami have softened the political influence of the anti-Castro exiles: younger Cuban Americans and recent immigrants are more open to engagement.
In Cuba, limited economic reforms carried out by Raul Castro have begun to relax the tight grip of the state, and pique the interest of American business.
Cuba has stopped exporting revolution to Latin America. In fact, it's mediating the most successful attempt so far to achieve peace between the Colombian government and Farc rebels, making its inclusion on the US list of states that sponsor terrorism look increasingly outdated.
Latin American countries think so: they've reintegrated Cuba into regional bodies by inviting it to the Summit of the Americas in April.
President Obama is also expected to attend, which perhaps helped focus his mind as he ponders how to shape his legacy during his remaining two years in office.
Mr Gross' arrest and imprisonment had previously undermined attempts to thaw diplomatic relations between the two countries.
Speaking at a news conference on Wednesday, he thanked his family and supporters, saying: "It was crucial to my survival knowing that I was not forgotten."
He described the policy shift as a "game changer".
Mr Gross was smiling ear-to-ear, a few of his teeth missing, the BBC's Suzanne Kianpour reports.
Our correspondent says a family spokesperson had warned the press about Mr Gross' missing teeth before he walked out, and for a man - who had been held captive for five years - there was a certain youthful candour about his concern for appearance.
Earlier, the 65-year-old arrived at Andrews Air Force Base near Washington, where he was met by US Secretary of State John Kerry and other officials.
Mr Kerry said he was looking forward "to being the first secretary of state in 60 years to visit Cuba".
Mr Gross spent five years behind bars after being accused of subversion, while on a mission to bring internet services to Jewish community groups in Cuba.
The US and Cuba say he was freed on humanitarian grounds.
The Cuban government has also freed an unnamed American intelligence officer who had been in jail in Cuba for nearly 20 years.
Three Cubans jailed in the US have arrived back in Cuba.
They are part of the so-called "Cuban Five" who US prosecutors said had sought to infiltrate US military bases and spied on Cuban exiles in Florida.
Two of them had recently been allowed to return to Cuba after finishing their sentences.
1959: Fidel Castro and his guerrilla army defeat the US-backed Cuban regime of Fulgencio Batista
1960-1961: Cuba nationalises US businesses without compensation; US breaks off diplomatic relations and imposes a trade embargo in response
1961: Failed Bay of Pigs invasion by CIA-backed Cuban exiles
1962: Soviet Union deploys ballistic missiles to Cuba, prompting Cuban Missile Crisis
2001: Five Cubans, dubbed the Cuban Five, are jailed in Miami for spying
2008: Raul Castro becomes Cuban president
2009: US citizen Alan Gross detained in Cuba accused of spying
Dec 2013: US President Barack Obama and Raul Castro shake hands at Nelson Mandela's funeral - the first such public gesture since 1959
17 December 2014: Alan Gross is released by Cuba