The upgrade to the Panama Canal is expected to double its capacity

In a nationwide referendum, people voted by a margin of four to one to back the $5.2bn plan, which involves building a new channel and new locks.

Many modern container ships are too large for the 50-mile (80km) canal linking the Pacific and Atlantic.

The government hopes the scheme, which will double the canal's capacity, will help lift the nation out of poverty.

President Martin Torrijos welcomed the result as celebratory fireworks lit up the sky.

"Never in the history of the country have we Panamanians taken a decision of this magnitude," he said.

"We have laid the foundation to build a better country."

Work on the expansion plan is due to start in 2008 and be completed in 2014. Panamanian authorities say it will generate thousands of jobs.

Traffic jam

The canal was completed in 1914 and, despite a series of upgrades over the past 92 years, has failed to keep pace with the growing scale of cargo ships.

PANAMA CANAL FACTS Handles an estimated 5% of world trade The main goods shipped are oil products, grain and container cargo Last year the canal handled 14,000 transits, shipping 200m tons of cargo Traffic between Asia and the east coast of the US accounts for more than 40% of shipping Q&A: What is proposed?

Forty ships a day - 14,000 a year - pass through it, about 5% of all world shipping.

Traffic has become so heavy that vessels using the canal can face costly delays as they wait in a queue to pass through.

The Panama Canal Authority, which runs the waterway, had warned that if the canal was not expanded, business would be lost to other shipping routes, including the Suez Canal.

Nicaragua, to the north, has proposed building its own canal between the Pacific and Atlantic oceans.

'Top source of income'

Panama's canal expansion has been the subject of nationwide debate, although voter turnout was low at about 40%.

Supporters say it will bring widespread benefits to the country, but opponents argue it will add to Panama's debt.

"No" supporters faced a well-funded pro-expansion campaign

In Panama City, voters wearing green "Yes" T-shirts far outnumbered opponents of the plan.

"Voting 'No' is like closing the door on the canal," boat salesman Leonardo Aspira told the Associated Press news agency.

"It's the top source of income for Panama and improving it means more money for the government and less poverty," he said.

But others have warned of corruption, and journalist Maribel Cuervo told the BBC the money would be better spent helping the poor.

"So how come the government is thinking [about] the maritime, commerce, and the shippers and all that? We have people living in extreme poverty."

As many as 60% of Panama's three million people live in poverty, according to some estimates.

Increased revenue from tolls is expected to cover some of the costs, but the plan still needs $2.3bn in loans.