"They have agreed that Panama will be the country that will replace them as a candidate for the Security Council," said Ecuador's UN ambassador Diego Cordovez, who hosted talks between the foreign ministers of Guatemala and Venezuela.
The 35-member Latin American and Caribbean group must still approve the choice for the seat, then the UN General Assembly will vote.
But the decision by Foreign Ministers Gert Rosenthal of Guatemala and Nicolas Maduro of Venezuela is expected to stand.
Guatemala, backed by the United States, led Venezuela by about 25 votes in all but one of the 47 rounds of balloting, which began on October 16 and ran for five days.
But Guatemala fell short of a required two-thirds majority in the 192-member UN General Assembly to secure the seat.
The 47th round was conducted and a new vote is scheduled in the assembly next Tuesday.
Despite Venezuela being a major oil supplier to the United States, ties have deteriorated, particularly since Mr Chavez described Washington as his No.1 enemy and called President George W Bush "the devil" in a General Assembly speech in September.
Diplomats said it cost him votes.
"It did not figure in our foreign policy plans to become part of the UN Security Council in the near future," Panama's Foreign Minister said in a statement in Panama City.
"Nevertheless, our country firmly intends to continue to do as much as possible to promote the UN goals of peace and justice for the world."
Diplomats said Panama was not mentioned until late in the day of talks between Guatemala and Venezuela.
Other potential candidates included Barbados, Costa Rica, the Dominican Republic and Uruguay.
Panama has good relations with the United States and Venezuela and recently welcomed both Bush and Chavez for visits.
Maduro told reporters that "Venezuela will continue to try for the democratisation of the United Nations."
He said it was necessary to have "a system that serves peace, that worked for the entire world and not one power," a reference to the United States.
Rosenthal, who had been campaigning for the seat for four years, called US support "a double-edged sword."
"In some ways it probably damaged our campaign," Rosenthal told reporters.
The United States, Russia, Britain, France and China hold permanent seats on the Security Council. Ten other nations sit on the council for two-year terms, five elected each year.
Guatemala and Venezuela were vying for the Latin American seat that Argentina will vacate on December 31. Peru stays on the council until the end of 2007 along with the Congo Republic, Ghana, Qatar and Slovakia.
In other regions, South Africa, Indonesia, Italy and Belgium received the necessary votes last month to win two-year terms in the council.
They replace Tanzania, Japan, Denmark and Greece.