The US has reopened its embassy in Cuba more than 54 years after it was closed, in a symbolic step signalling the warming of ties between both countries.
John Kerry, the first US Secretary of State to visit Cuba in 70 years, presided over the ceremony in Havana.
The US flag was presented by the same US marines who brought it down in 1961.
Cuba reopened its embassy in Washington last month but the former Cuban leader Fidel Castro has blasted the US for not lifting its trade embargo.
In an open letter on Thursday, Mr Castro said the US owed Cuba millions of dollars because of its 53-year-long embargo. The letter makes no mention of the reopening of the US embassy.
Mr Kerry described the hoisting of the flag as a "historic moment" speaking during the ceremony on Friday.
But he also warned that the US would not stop pressing for political change in Cuba.
"The people of Cuba would be best served by a genuine democracy, where people are free to choose their leaders," he told a crowd of hundreds gathered outside the embassy building.
In the past, he conceded, US policies have not led to democracy. "Cuba's future is for Cubans to shape," he added.
Three retired marines who lowered the American flag for the last time on 4 January 1961 handed it over to marines to raise it once again in Havana as the American national anthem played.
"I'm gonna love seeing that flag go back up," said former marine Jim Tracy, 78, in a US State Department video released ahead of the ceremony.
Cuban leader Raul Castro and US President Barack Obama agreed to restore ties in December last year.
While trade and travel restrictions have been relaxed, the Republican-led US Congress has not lifted the trade embargo the US imposed on the communist-run island in 1960.
Mr Kerry's visit to Cuba drew criticism from several leading Republicans, including presidential candidate Jeb Bush who said it was "a birthday present for Fidel Castro - a symbol of the Obama administration's acquiescence to his ruthless legacy".
He and Marco Rubio, another presidential contender and Cuban-American senator in Florida, also criticised the US secretary of state for not inviting Cuban dissidents to the ceremony. Mr Kerry said he was due to meet dissidents at a private event later on Friday.
Cuba says the embargo - which it calls a blockade - is hugely damaging to its economy.
It says relations will be fully restored only once it is lifted.
Fidel Castro's letter was published in state newspaper Granma to mark his 89th birthday.
In it, Mr Castro said Cuba was committed to "good will and peace in our hemisphere" but added: "We will never stop fighting for the peace and welfare of all human beings, regardless of the colour of their skin and which country they come from."
Fidel Castro led his country from the Cuban Revolution, in 1959, until 2006, when he stood down because of undisclosed health problems.
He passed on power to his younger brother, Raul, who embarked on a number of economic reforms.