Obama, Castro discuss ties, to meet at summit amid U.S.-Cuba detente

PANAMA CITY (Reuters) - U.S. President Barack Obama and Cuban President Raul Castro have talked by telephone about restoring diplomatic ties and are due to meet at a summit this weekend as they seek to set aside decades of hostility between two Cold War enemies.

The historic rapprochement is set to dominate the Summit of the Americas meeting in Panama, less than four months after a landmark announcement by Obama and Castro that they would seek to improve relations and boost trade and travel.

The leaders spoke by phone on Wednesday before Obama left Washington, discussing the process of resuming formal diplomatic relations and opening embassies, the White House said.

They have separate agendas for most of the day but will both attend the start of the two-day summit along with other regional leaders on Friday evening.

The pair are expected to meet on Saturday, said Ben Rhodes, Obama's deputy national security adviser. "We certainly do anticipate that they will have the opportunity to see each other at the summit tomorrow, to have a discussion."

Apart from a couple of brief, informal encounters, the leaders of the United States and Cuba have not had any significant meetings since Castro's older brother, Fidel Castro, toppled U.S.-backed dictator Fulgencio Batista in a 1959 revolution that soon steered the Caribbean island into a close alliance with the Soviet Union.

U.S. Secretary of State John Kerry and Cuban Foreign Minister Bruno Rodriguez held talks at a Panama City hotel on Thursday night, the first meeting between the two countries' top diplomats since the United States' John Foster Dulles and Cuba's Gonzalo Guell got together in Washington in 1958.

Sitting face-to-face in a room visible through a large glass window, Kerry and Rodriguez talked for over two hours. A senior U.S. State Department official described it as a "lengthy and very constructive discussion" and said they made progress.

Colombian President Juan Manuel Santos hailed Obama's push to improve relations with Cuba, saying it was helping to cure a "blister" that was hurting the region.

Obama, who visited the site of a massive expansion of the Panama Canal by helicopter on Friday morning, appears to be close to removing communist-run Cuba from a U.S. list of countries that it says sponsor terrorism.

Cuba has cited its continued inclusion on the list, which includes a series of automatic U.S. sanctions, as a hindrance to the plans to restore diplomatic ties and open embassies announced by Obama and Castro last December.

Washington imposed trade sanctions on Cuba from 1960 and broke off diplomatic relations with Cuba in 1961, but the ensuing freeze did it no favours, Rhodes said.

"Our Cuba policy, instead of isolating Cuba, was isolating the United States in our own backyard," he noted.

The two countries have maintained contact with each other through interests sections in Havana and Washington since 1977, and in recent decades have cooperated on issues such as migration and drug trafficking.

TERRORISM LIST

The State Department has now recommended that Cuba be taken off the terrorism list, a U.S. Senate Foreign Relations Committee aide said on Thursday. Obama is expected to agree, although it is not clear whether he will announce his decision during the summit.

A U.S. official said Kerry and Rodriguez used their meeting to pave the way for Cuba's removal from the list.

Obama's path to a new Cuba policy was eased in part by changing attitudes in the large Cuban-American population, which for years was fiercely opposed to any warming of ties and lobbied strongly in Washington.

Obama has already used his executive authority to ease some trade and travel restrictions, such as seeking to encourage nascent small business in Cuba by allowing more exports there.

But only Congress, controlled by Republicans, can remove the overall U.S. economic embargo on the island. The rapprochement by Obama, a Democrat, has met some resistance in Washington and among some influential Cuban-Americans.

Critics, sceptical of economic reforms undertaken by Raul Castro since he took over as president from his ailing brother Fidel in 2008, say Cuba should not be rewarded unless it changes its one-party political system.

SHADOW OF VENEZUELA

While the U.S. president's policy has been widely praised around Latin America, this was tempered last month when his administration imposed sanctions on Venezuela, Cuba's closest ally and main benefactor.

That controversy now hangs over the summit and Kerry's counsellor, Thomas Shannon, was in Venezuela earlier this week in an apparent bid to ease tensions.

Venezuelan President Nicolas Maduro plans to present Obama with a petition signed by millions of people demanding that the sanctions be reversed. He is certain to receive support from Castro and other left-wing leaders in Latin America.

"It is no time for imperialism, threats, it is time for peace, cooperation, union, progress, prosperity," Maduro said on arrival in Panama.

(Additional reporting by Jeff Mason, Roberta Rampton and Dave Graham; Editing by Kieran Murray, Simon Gardner and Frances Kerry)