The 5.25-billion-dollar plan to widen the transcontinental canal will allow the world's biggest ships to sail between the Pacific and Atlantic Oceans.
"Today we have become the masters of our own destiny," an elated President Martin Torrijos said in an address to the nation. "Today, we have laid the foundation of a better country."
Election officials announced that more than 78 per cent of voters had said "yes" to the plan calling for construction of a third set of locks and other modernisation work along the waterway.
President Torrijos and the Panama Canal Authority, the government agency that has run the waterway since it was handed over to Panama by the United States in 1999, insist that the project is vital.
They argue that without it, the 92-year-old waterway would become obsolete after 2012.
About 80 percent of the gross domestic product of Panama, a small country of three million people, is linked directly or indirectly to canal activity. Its main users are the United States, China and Japan.
It takes approximately nine hours to cross the Isthmus of Panama, the tiny middle of the Americas, via the 80 kilometre canal, but the actual average time, including the wait, is 26 hours.
Proponents say the canal, through which roughly four percent of world trade flows, badly needs an overhaul to accommodate larger ships and remain competitive against other maritime routes.
Increasingly modern vessels cannot fit and must travel around Cape Horn at the southern tip of South America to connect to ports on the east and west of the Americas.
The canal’s proposed third lane, which would be parallel to the existing two would accommodate these massive vessels.
Construction is scheduled to begin in late 2007 and is expected to be completed seven years later.
The government says the work will be financed by a hike in tolls, worth more than $1 billion dollars last year.