Diplomatic ties between US and Cuba were severed in 1961 in the heat of the Cold War.
"The progress that we mark today is yet another demonstration that we don't have to be imprisoned by the past. When something isn't working, we can and will change," said President Obama in a statement issued on Wednesday.
Reopening the doors is more than a symbolic step. "With this change, we will be able to substantially increase our contacts with the Cuban people," President Obama said.
The President Obama also sent letter to Cuban President Raul Castro about re-establishing diplomatic relations and permanent diplomatic missions in the United States and Cuba.
The re-establishing of embassies is a final step in the full diplomatic thaw President Barack Obama initiated in December. Since then, the US has loosened some travel restrictions to Cuba and allowed for some new economic ties.
Obama announced his decision to remove Cuba from the list of state sponsors of terror last month following a historic meeting with Cuban President Raul Castro during Summit of the Americas held in Panama in April.