The leaders of the United States and Cuba have held their first formal meeting in Panama in more than half a century, clearing the way for a normalisation of relations that had seemed unthinkable to both Cubans and Americans for generations.

In a small conference room in a convention center in capital Panama City, President Barack Obama and Cuban President Raul Castro sat side by side on Saturday in a bid to inject fresh momentum into their months-old effort to restore diplomatic ties.

Obama said he wanted to "turn the page" on old divisions, although he acknowledged that significant differences between the governments would remain.

"This is obviously a historic meeting," Obama said shortly after the two sat down. "It was my belief it was time to try something new, that it was important for us to engage with Cuban government."

Castro told the US president he was ready discuss sensitive issues including human rights and freedom of the press, saying, "Everything can be on the table." But he also cautioned that the two countries have "agreed to disagree."

"We are willing to make progress in the way the president has described," Castro said.

During a roundtable summit with other leaders of the American hemisphere earlier, he praised Obama as "an honest man", Castro said "every US president before him is to blame" for making Cuba suffer under US blockade. 

Al Jazeera's Latin America editor Lucia Newman, who is also reporting from Panama City, said that Castro's statement came as a surprise to many observers.

"Who would have guessed that of all people, President Raul Castro would sound like almost conciliatory, almost like the new best friend of Barack Obama," she said.

Newman said Cubans attending the summit were astounded at how quickly hostility had turned into cordiality.

"A journalist told me: 'Raul is never this emotional, he never drifts from his script, and yet here he has done both'," Newman said. 

She also said that the meeting represents an important foreign policy achievement for Obama, who is set to end his presidency in less than two years, as well as for Castro, who is in his 80s and who has hinted at retiring soon.    

High expectations

Cubans gather their demands in advance of US-Cuba summit

There are expectations that Obama will use the meeting to announce his decision to remove Cuba from the US list of state sponsors of terrorism.

On Thursday, Obama suggested an announcement was imminent when he said that the State Department's lengthy review of the designation was finally complete.

Cuba has eagerly sought that move, and Cubans are hoping that their economy will benefit from the decision, our correspondent said.

The US has long ago stopped accusing Cuba of conducting terrorism, and Obama has indicated that he is ready to take Cuba off the list.

Mending ties with Cuba could form a cornerstone in the foreign policy legacy for Obama, with Latin America a rare bright spot for the president.

Obama and Raul Castro had shook hands once before, at the funeral of South African President Nelson Mandela, but expectations are higher this time following Obama's decision in December to begin talks on restoring relations with Cuba that were severed in 1961.

Source: Al Jazeera and agencies