Panama City (AFP) – Panama on Thursday rejected the United States' claim of securing free passage for its government vessels through the Panama Canal, while bowing to US pressure to quit a key Chinese project.

Panamanian President Jose Raul Mulino told reporters the US assertion about the waterway was "intolerable," adding that he rejected "bilateral relations based on lies and falsehoods."

Since winning the US election in November, President Donald Trump has refused to rule out the use of force to seize the canal built by Washington over a century ago and later handed over to Panama.

Around 40 percent of US container traffic passes through the narrow body of water linking the Caribbean Sea with the Pacific Ocean.

The new row between Panama and Washington erupted after the US State Department claimed that Panama had agreed to let American government vessels through the canal for free after talks last weekend between Mulino and Trump's Secretary of State Marco Rubio.

In a post on the social media platform X, the State Department claimed the decision would save the US government "millions of dollars a year."

Speaking Thursday in the Dominican Republic, Rubio argued that it was "absurd" for US naval vessels to have to pay "to transit a zone we are obligated to protect in time of conflict."

He stopped short however of claiming that an agreement had been reached.

The Panama Canal Authority (PCA), an independent body that runs the waterway, said it had "not made any adjustments" to its tariffs but that it was open to dialogue on the matter.

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