Raul Castro has introduced a series of reforms since taking office in February
The European Union has lifted sanctions imposed on Cuba in 2003 in protest at the Cuban government's imprisonment of more than 70 dissidents.
But EU External Relations Commissioner Benita Ferrero-Waldner said the EU would continue to monitor human rights conditions in Cuba.
The sanctions' removal is largely symbolic but still a success for Raul Castro's new government, analysts say.
The decision is expected to come into formal effect on Monday.
Ms Ferrero-Waldner said the member states wanted to promote change in Cuba after Raul Castro took over as the head of government from his ailing brother, Fidel.
"There will be very clear language also on what the Cubans still have to do... releasing prisoners, really working on human rights questions," she told reporters at an EU summit in Brussels.
"There will be a sort of review to see whether indeed something will have happened," she said.
Several leading Cuban dissidents have criticised the decision.
In a BBC interview, Miriam Leiva - one of the founding members of the dissident group Ladies in White - said the move was unwarranted as the island's new president had not made any significant moves towards creating a more open or democratic society.
Her words were echoed by another dissident, Vladimiro Roca, who accused Spanish Prime Minister Jose Luis Rodriguez Zapatero of pushing the measure forward against the will of his own people.
But the BBC's Michael Voss in Havana says Cuba will see this move as a vindication of its hardball diplomacy.
The EU sanctions were suspended in 2005, but not completely removed.
The EU has been trying to re-establish a full political dialogue with Havana ever since Fidel Castro in effect stepped down due to ill health almost two years ago, our correspondent says.
But the communist authorities had insisted there could be no progress until the EU officially removed sanctions.
The decades-old US trade embargo against Cuba remains in place.
Earlier, the US state department said it hoped the EU sanctions would not be lifted because there had not been "any kind of fundamental break" with communism as practised under Fidel Castro.
The original sanctions imposed by the EU five years ago included a limit on high-level government visits and the participation of EU diplomats in cultural events in Cuba.
Most European embassies also invited prominent Cuban dissidents to receptions as a protest against the country's human rights record.
This triggered the so-called "cocktail wars" where Cuban officials refused to attend, our correspondent says.
Relations improved in 2005, but the measures were not completely removed.
Since Raul Castro in effect took over from his brother, Fidel, Spain in particular has pressed hard for a complete removal of the sanctions in the light of what it sees as important reforms in Cuba.
Other countries like Sweden, and in particular the Czech Republic, believe the changes are mainly cosmetic, especially in the area of human rights.
In practice, the EU sanctions are largely symbolic. Unlike the US embargo which has been in force since 1962, they do not amount to any restriction on trade or investment.
Moreover, in recent years, and particularly under Raul Castro, who officially became president in February, the Cuban government has diversified its international relations.
Venezuela, which supplies billions of dollars worth of oil in exchange for Cuban doctors, and China, which buys considerable amounts of Cuba's nickel, are much more important trading partners than Europe.
Cuban government sources told the BBC the decision to lift sanctions would benefit the EU more than Cuba since it showed that Brussels could have a foreign policy independent of the US, our correspondent says.