WASHINGTON (AP):

After a half-century of Cold War acrimony, the United States and Cuba moved on Wednesday to restore diplomatic relations - a historic shift that could revitalise the flow of money and people across the narrow waters that separate the two nations.

President Barack Obama's dramatic announcement in Washington - seconded by Cuban President Raul Castro in Havana - was accompanied by a quiet exchange of imprisoned spies and the celebratory release of American Alan Gross, a government contract worker who had been held in Cuba for five years.

The shift in US-Cuba policy was the culmination of 18 months of secret talks between the longt-ime foes that included a series of meetings in Canada and the personal involvement of Pope Francis at the Vatican. It also marked an extraordinary undertaking by Obama without Congress' authorisation as he charts the waning years of his presidency.

"These 50 years have shown that isolation has not worked," Obama declared at the White House. "It's time for a new approach."

Obama spoke as Castro was addressing his nation in Havana, where church bells rang and school teachers paused lessons to mark the news. Castro said that while the US and Cuba remain at odds on many matters, "we should learn the art of living together in a civilised manner in spite of our differences."

economic ties

Obama's plans for remaking US relations with Cuba are sweeping: He aims to expand economic ties, open an embassy in Havana, send high-ranking US officials including Secretary of State John Kerry to visit and review Cuba's designation as a state sponsor of terrorism. The US also is easing restrictions on travel to Cuba, including for family visits, official government business and educational activities. But tourist travel remains banned.

Obama and Castro spoke by telephone on Tuesday for nearly an hour, the first presidential-level call between their nations' leaders since the 1959 Cuban revolution and the approval of a US economic embargo on the communist island that sits just 90 miles off coast of Florida. The two men are also expected to meet at a regional summit in Panama next spring.

Despite Obama's declaration, the Cuba embargo was passed by Congress, and only lawmakers can revoke it. That appears unlikely to happen soon given the largely negative response to Obama's actions from Republicans who will take full control of Capitol Hill in January. In Cuba, a sense of euphoria spread through Havana as people gathered around televisions to watch the Obama and Castro announcements.

"For the Cuban people, I think this is like a shot of oxygen, a wish come true, because with this, we have overcome our differences," said Carlos Gonzalez, a 32-year-old information technology specialist.