Lying at the crossroads of the North and South American continents and the Atlantic and Pacific oceans, Panama is of immense strategic importance.
This has made it a target for intervention by the US, which in 1989 invaded Panama to depose a former ally, Manuel Noriega, and until 1999 controlled the Panama Canal.
Panama has the largest rainforest in the Western Hemisphere outside the Amazon Basin and its jungle is home to an abundance of tropical plants, animals and birds - some of them to be found nowhere else in the world.
However, it is for a feat of engineering, a canal connecting the Atlantic and Pacific oceans, that Panama is famous. Every year hundreds of thousands of people make the eight-hour journey through the waterway and it generates a proportion of the country's GDP.
Panama is widening the canal, which is more than 90 years old and operating almost at full capacity, to allow it to handle more and larger vessels. Work on the scheme, which was approved in a referendum in 2006, began in September 2007.
Offshore finance, manufacturing and a shipping registry generate jobs and tax revenues. Panama's services-based economy also benefits from the Colon free trade zone, home to some 2,000 companies and the second largest in the world.
A free trade agreement with the US was negotiated in 2006 but its implementation was held up pending approval by the US Congress, which was not granted until 2011.
The Panama canal is a conduit for global cargo
Bananas are the main cash crop, but the trade has been hit by disease and is vulnerable to tariff changes in the European export market.
Panama faces the challenge of shaking off its reputation as a major transit point for US-bound drugs and illegal immigrants, and as a haven for money-laundering.
It also needs to address social inequality. Elite families of European descent control most of Panama's wealth and power, while about 33% of the population lived below the poverty line.
The canal, the natural attractions of its pristine forests and coastlines, and a lively, modern capital are fuelling a growing tourism industry.
Conservative supermarket magnate Ricardo Martinelli was elected to succeed Martin Torrijos with a landslide victory at the April 2009 presidential election.
Mr Martinelli's business credentials drew voters worried by slowing growth
Standing for the four-party opposition Alliance for Change, Mr Martinelli gained 61% of the vote, against 37% for Balbina Herrera, the candidate of the governing left-wing Democratic Revolutionary Party.
The result appeared to run counter a wider Latin American trend towards the left.
With Panama's recent rapid rate of economic growth slowing as a result of the global economic slump, Mr Martinelli's business background attracted many voters fearful about job losses.
The previous government was blamed for rising crime and a surge in prices, and Mr Martinelli tapped into feelings that little had been done to spread the wealth created in the economic boom to low-income Panamanians.
During the campaign, he promised to promote free trade, especially with the US, Panama's biggest trading partner, and to encourage foreign investment.
Days after being elected, Mr Martinelli said one of his priorities would be the ratification of a free trade deal with the US.
Among his proposals were a flat income tax of between 10% and 20% to draw investors to the country, as well as an ambitious public works programme.
He also promised to forge ahead with a $5.25bn expansion plan for the Panama Canal, the country's main engine for economic growth.
Mr Martinelli was born in 1952 in Panama City, and has a degree from the University of Arkansas. Apart from owning the Super 99 supermarket chain, he has interests in several other businesses, including banks and agricultural firms.
He is the leader of the Democratic Change party founded in 1998, and unsuccessfully stood for president in 2004.
Panama's media are free to present news and comment. According to Reporters Without Borders: "Panama stands out as an exception in Central America, which is notoriously dangerous. Cases of assaults against journalists are extremely rare."
In 2011, however, leading news media launched a campaign in defence of freedom of expression, citing a growing number of threats and attacks on journalists.
Broadcasting is dominated by the private sector. Corporacion Medcom operates the most-popular TV stations. There are around 100 radio stations and several TV networks.
More than one and a half million Panamanians, or 43% of the population, were online by December 2011. (Internetworldstats.com).
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