"With the firm promise that in this land we can always exclaim with pride that glory to our heroes and martyrs. Long live Fidel, long live the revolution, long live free Cuba!" said President Castro.
He was speaking from the very place where his elder brother proclaimed victory after the US-backed dictator Fulgencio Batista had fled the country 50 years ago.
He spoke proudly of the 1959 revolution that transformed the Caribbean island into a communist state 145 km (90 miles) from US shores, but warned the country should remain vigilant.
"The enemy will never cease to be aggressive, treacherous and dominant," he said.
"It is time to reflect on the future, on the next 50 years when we shall continue to struggle incessantly.
"I'm not trying to scare anyone, this is the truth," he added.
A series of free concerts had been planned across the island, but the authorities said it was not the time for lavish celebrations after the nation suffered one of the most difficult financial years since the collapse of the Soviet Union.
The frail health of Fidel Castro has also dampened the mood of anniversary celebrations, says the BBC's Michael Voss in Havana.
The 82-year-old has not been seen in public since undergoing major surgery almost 18 months ago. There was no pre-recorded message on state television on New Year's Eve nor one of his regular newspaper editorials to mark the event.
Nonetheless, he remains a towering presence in Cuba, even in the background.
Raul Castro has introduced some limited reforms since he has been in charge, but many Cubans believe that as long as Fidel is alive, no meaningful political or economic change will happen, correspondents say.
Fifty years on, the legacy of the revolution is complex. There is free education and health care but the state-controlled economy means wages for many Cubans are very low, on average about $20 to $25 a month.
The country's difficulties cannot just be blamed on the US trade embargo, in place since 1962, or global financial problems, says our correspondent.
There is enormous pressure and expectation amongst Cubans for change, he adds.
Over the decades since the revolution, political opposition has been crushed and hundreds of thousands of Cubans have gone into exile.
"The Castro brothers have not treated their people particularly well," said White House spokesman Gordon Johndroe on the eve of the anniversary.
"Many political dissidents are in jail. The economy is suffering and not free. And the United States will continue to try to seek the freedom of the people of Cuba, and support them."
During his time in office, President George W Bush imposed tight restrictions on Cuban-Americans visiting the island and the amount of money they could send.
However, US policy towards Cuba appears set to change.
President-elect Barack Obama, who takes office on 20 January, has said he will maintain the Cuban embargo but that some restrictions could be eased.
Attitudes among Cuban-Americans may also be changing. A recent poll suggested that for the first time a majority of those living in Miami, the centre of anti-Castro sentiment, favoured ending the embargo.
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