The Stars and Stripes were raised over the newly-reopened US Embassy in Cuba for the first time in more than half a century.
US Secretary of State John Kerry called for democratic change on the island which has been ruled by a single party for more than five decades.
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“We remain convinced the people of Cuba would be best served by a genuine democracy where people are free to choose their leaders, express their ideas, practice their faith,” Mr Kerry said.
He made his address before an audience of Cuban and US diplomats on the embassy grounds and millions of islanders watching and listening live.
Political change remains a taboo topic in Cuba despite a series of economic reforms and the re-establishment of diplomatic ties with the US under President Raul Castro, who took over when his brother Fidel formally stepped down in 2008 after decades in power.
After the ceremony, Mr Kerry met with Cuban foreign minister Bruno Rodriguez.
He told reporters that diplomats would meet in the second week of September to set the agenda for wide-ranging talks on normalisation, covering topics from maritime security and public health to the billions of dollars in claims and counter-claims stemming from Cuban confiscation of US property and the subsequent US trade embargo on Cuba.
Mr Rodriguez said the countries continue to have profound differences over issues such as human rights.
He accused the US of rights abuses from police shootings of black men to mistreatment of prisoners at naval base Guantanamo Bay.
President Barack Obama made a milder call for change in Cuba when he announced the new US policy of engagement on December 17 last year.
A live call for change from a serving US official speaking in Havana – Mr Kerry is the first secretary of state to visit since 1945 – was remarkable for its bluntness and the national spotlight in which it came.
Many islanders lauded Mr Kerry’s call for reform, including greater access to technology on an island with one of the world’s lowest rates of internet penetration.
They paired their praise with calls for the US to lift the 53-year-old trade embargo on Cuba and allow easier travel between the two countries.
Mr Kerry said a long-time US strategy of trying to isolate Cuba, foment grass-roots agitation and provoke regime change by choking off trade and finance through the embargo had failed.
“The policies of the past have not led to a democratic transition here in Cuba. It would be equally unrealistic to expect normalising relations to have a transformative impact in the short-term,” he said. “After all, Cuba’s future is for Cubans to shape.”
After speaking to reporters with Mr Rodriguez, Mr Kerry briefly walked Old Havana’s historic Plaza de San Francisco with Havana City historian Eusebio Leal, stopping to look in shops and greet residents and store owners.