"Clearly the Castro regime will not change by its own choice, but Cuba must change," Mr. Bush said at a Rose Garden ceremony Friday morning.
Mr. Bush called for a crackdown on banned travel to Cuba, which he said helps prop up the regime because foreign-owned resorts pay their workers' wages directly to the government.
He also vowed to encourage immigration to America from the island nation.
"We'll increase the number of new Cuban immigrants we welcome every year," he added. "We are free to do so, and we will for the good of those who seek freedom."
The president also announced that Secretary of State Colin Powell and Cuban-born Housing Secretary Mel Martinez will chair a panel that will "plan for the happy day when Castro's regime is no more and democracy comes to the island."
"The transition to freedom will present many challenges to the Cuban people and to America, and we will be prepared," Mr. Bush said.
Scores of Bush supporters from Congress, the Miami community of Cuban exiles and other anti-Castro groups were briefed in advance of the official announcement.
The administration has been signaling for weeks that new steps concerning Cuba were being planned.
Some of Castro's most ardent opponents have criticized the Bush administration for not doing more to bring about democratic change in Cuba.
Florida, a vote-rich swing state, is one of the states Mr. Bush has visited most since becoming president. The votes of Miami's Cuban-American community could be crucial in the 2004 presidential election.
Mr. Bush's relations with his backers in Miami hit a low point in July when Washington returned 15 migrants to Cuba after receiving assurances they would not be executed for hijacking a government-owned boat that was intercepted at sea by the Coast Guard.
The president's brother, Florida Gov. Jeb Bush, took issue with the decision, saying it wasn't right to send the Cubans back to Castro's regime.
Powell has been trying to enlist other nations in efforts to bring democracy to a country that has not had a free election since Castro assumed power in 1959.
In a June speech in Chile to Organization of American States foreign ministers, Powell asked his colleagues to join the United States in promoting a peaceful transition to democracy in Cuba.
Castro has scoffed at the notion that Cuba needs a transition, contending that the island had one 44 years ago.
The head of Cuba's diplomatic mission here, Dagoberto Rodriguez, said Thursday that Mr. Bush should "stop acting like a lawless cowboy" and "start listening to the voices of the nations of the world."
Speaking at a news conference, Rodriguez noted that each fall, for 12 years, the U.N. General Assembly has urged the United States to lift its trade embargo against Cuba. He said the General Assembly is expected to approve a similar measure next month.
Mr. Bush has said he will veto any measure approved by the Congress that calls for an easing of the embargo, which has been in effect for more than four decades.
Rodriguez also demanded that the administration "stop lying" about Cuba "just to please a small minority of extremists," a reference to the Cuban-American community in South Florida.