The historic project got off to a spectacular start

The historic scheme was launched by Panama's president at a colourful ceremony featuring explosions and the release of thousands of balloons.

Panamanians overwhelmingly backed the plan in a referendum held in 2006.

Many tankers are now too large for the 50-mile (80km) route and supporters say the modernisation is vital to maintain trade and will create 7,000 jobs.

But opponents have attacked the project, due to be completed by 2014, arguing that it will damage the environment and widen the gap between rich and poor in the country.

It is estimated that, in volume terms, around 5% of the world's trade passes through the Panama Canal.

Foreign dignitaries including Jimmy Carter were present

The government has said the scheme will be financed by raising tolls on the waterway as well as through foreign credit.

It will involve adding a third set of locks that will enable modern ships to use the canal.

Before a crowd of leading businessmen and foreign dignitaries, President Martin Torrijos said it was a historic day for the Panamanian people.

"We are witnesses to an exceptional and unique act," he said. "In 30 years, Panamanians will remember this day and about the right decision this generation made."

The US ceded control of the canal, which it built in the early 20th Century, in 1999.

Former US President Jimmy Carter, who signed an agreement in 1977 paving the way for Panama to take control of the waterway, said he was "proud" of the expansion plans.