Panama has established diplomatic ties with China and broken with Taiwan in a major victory for Beijing, which continues to lure away the dwindling number of countries that have formal relations with the self-ruled island.
Panamanian President Juan Carlos Varela said in a televised address that Panama was upgrading its commercial ties with China and establishing full diplomatic links with the second most important customer of its key shipping canal.
"I'm convinced that this is the correct path for our country," Varela said.
Taiwan's government said it was sorry and angry over Panama's decision, and said it would not compete with China in what it described as a "diplomatic money game".
"Our government expresses serious objections and strong condemnation in response to China enticing Panama to cut ties with us, confining our international space and offending the people of Taiwan," David Lee, Taiwan's minister of foreign affairs, told a briefing in Taipei.
Taiwan would immediately end co-operation with and assistance for Panama, and evacuate embassy and technical personnel "in order to safeguard our national sovereignty and dignity", Lee said.
China is deeply suspicious of Taiwan President Tsai Ing-wen, who it thinks wants to push for the island's formal independence, although she says she wants to maintain peace with Beijing.
China and Taiwan have tried to poach each other's allies over the years, often dangling generous aid packages in front of developing nations, although Taipei struggles to compete with an increasingly powerful China.
Panama is the second country to switch its recognition to Beijing since Tsai took office last year, following a similar move by Sao Tome and Principe in December, trimming to 20 the number of countries that formally recognise Taiwan.
China's Foreign Minister Wang Yi met his counterpart from Panama, Isabel de Saint Malo, in Beijing on Tuesday and signed a joint communique establishing ties.
"This is a historic moment. China-Panama relations have opened a new chapter," Wang said, describing Panama's decision as in "complete accordance" with its people's interests and "in keeping with the times".
Panama's government said in a statement that it recognised there was only one China, with Taiwan belonging to the Asian giant, and that it was severing ties with Taipei.
