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.
Mr Kerry said the US administration wanted to lift the trade embargo on the island – something that the Republican-controlled US Congress has blocked.
In an open letter on Thursday, former Cuban leader Fidel Castro said the US owed Cuba millions of dollars because of its 53-year-long embargo.
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.
Mr Kerry said Congress will not lift the economic embargo if there is no movement on issues of freedom of conscience.