Legislators from the ruling Democratic Revolutionary Party and opposition parties voted on Thursday to hold the referendum in three months.

They argue that the canal must be widened to allow a new generation of larger cargo ships to pass through it.

Some union workers and intellectuals have formed a group called 'National Union for No' to oppose the proposal.

They say that the project lacks an accompanying social development plan and will put the country into too much debt.

Polls show that a majority of Panamanians favour expanding the canal.

Bigger ships

The 80km (50 mile) canal operates at nearly full capacity but will become obsolete in several years as cargo ships become larger, experts say.

The biggest ships that can pass through the canal today are known as Panamax vessels and can carry 4,000 cargo containers. They barely fit in the locks, which are about 108 feet wide.

The project will allow the larger Post-Panamax class of cargo ships to use the waterway.

The canal handles 4% of the world's maritime trade and generates a large part of the Panama's income. Its principal users are the United States, China, Japan and Chile.

To enlarge the canal, Panama will have to construct two new sets of locks, dig new access canals and widen the navigation canals.

Long-term investment

Authorities have said they would pay for the upgrades through toll increases for ships using the canal and through a $2.3 billion loan from a private bank.

More than 14,000 ships used the canal in 2005, generating more than $1.2 billion in reveune 

Panama took over the waterway on December 31, 1999, when the US military presence in Panama ended.