US President Barack Obama has confirmed a new policy towards Cuba and the steps that will be taken to "normalise relations" with the country in a landmark television address.

Obama stated that sanctions placed on Cuba had little effect on the country and that both the American and Cuban people were not well-served by the "rigid" policy against the country that was implemented by Washington decades ago.

"Isolation has not worked. It's time for a new approach," he said of the embargo policy in place on Cuba since 1961.

On news of increased trade between US and Cuba, he said: "increased commerce is good for Americans and Cubans."

Obama added that he has asked US Secretary of State John Kerry to review Cuba's status as a state sponsor of terrorism.

He said that American contractor Alan Gross was released on humanitarian grounds and confirmed that American policy towards Cuba will change following his release, as his imprisonment was a major barrier to improving the relationship.

Speaking at the same time, Cuban leader Raul Castro - son of former leader Fidel - confirmed that Cuba had agreed to "re-establish diplomatic relations" with the United States.

It was revealed by a senior US official that both leaders spoke to each other on the phone for almost an hour, discussing cooperation on a variety of issues such as counter-terrorism and combatting the spread of the deadly tropical virus Ebola.