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Mr Obama said Washington's current approach was "outdated" and the changes were the "most significant" in US policy towards Cuba in 50 years.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.

The US is looking to open an embassy in Havana in the coming months, Mr Obama said.

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government and Farc rebels, making its inclusion on the US list of states that sponsor terrorism look increasingly outdated.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.