Writing on Twitter, Panama President Ricardo Martinelli said that the move was "surprising," adding: "Panama only longs for our sister country to find peace and strengthen its democracy,"
Earlier, during a ceremony marking the anniversary of Hugo Chavez's death, Maduro said he had also decided to freeze all trade and economic ties with the Central American nation.
Maduro directed his anger against Panama after it requested a private meeting of the Washington-based Organization of American States to be held on Thursday to seek solutions to resolve tensions in Venezuela.
Panama is proposing consultations between foreign ministers to examine the situation in Venezuela.
"In the face of the open conspiracy of the Panamanian government's ambassador to the OAS, I have decided to break political and diplomatic relations with Panama," Maduro said at a former military barracks where Chavez is entombed.
"Nobody will conspire with impunity to ask for an intervention against our fatherland. Enough!" Maduro thundered as leftist presidents Raul Castro of Cuba, Daniel Ortega of Nicaragua and Evo Morales of Bolivia looked on.
At least 18 people have died in anti-government protests since they first erupted on February 4.
Maduro says the protests are a US-backed plot by "fascists" to overthrow his government.
The socialist leader expelled three US diplomats last month, prompting Washington to kick out three Venezuelan embassy officials.
The two nations have not had ambassadors since 2010, though Maduro has designated a new envoy to Washington
