Responding to violent clashes that spread to Panama City over a controversial law allowing the sale of state-owned land in Latin America's largest duty-free zone, Panama's government has said it will cancel the legislation.

President Ricardo Martinelli, currently on a visit to Vietnam, said via Twitter on Friday that the law had been well-intentioned but that the country would scrap it.

"The law sought the best for Colon," he wrote. "We will proceed to repeal it. We want peace and tranquillity for all."

Though the land in question is in the port city of Colon, protests spread to Panama City, where protesters battled police with sticks and rocks, and police fired tear gas.

Construction workers briefly blocked roadways in the capital, including one that leads to the city's airport, and staged marches in sympathy with the protests in Colon.

Three people have died in the week-long demonstrations, including a 10-year-old boy and two adults. More were injured and arrested.

The impoverished part of Colon, which depends economically on the Free Trade Zone abutting the Panama Canal, has lurched into chaos since the National Assembly passed the law last Friday to allow the sale of lands next to the city.

'Radical' opposition

Sergio Galvez, an ally of Martinelli and the president of the National Assembly, blamed the protests on the "radical" opposition politicians, but said that the government had quickly rectified the situation.

"I think that the law was a healthy one, that would bring many advantages and a future to the province of Colon," said Galvez.

"Sadly, politics prevailed, coming from the radical opposite lawmakers that oppose everything in this country.

"They got away with it, and we have to repeal [the law]. But the government and President Martinelli rectified it and we are bringing social peace back to this country," he said.

Protesters said the land is already being rented and it makes no sense to sell it. They said the government should instead raise the rent and invest the money in Colon, a poor and violent city.

Under the law, 35 per cent of proceeds from land sales in the zone were to go to a trust run by Colon authorities to make social investments, while the rest would go into the national treasury coffers.

After the protests erupted, the government said it would put 100 per cent of the proceeds into local social development, but the concession failed to satisfy demonstrators.

The duty-free zone has about 2,000 companies that rent land and employ 30,000 people, according to authorities. The government estimates land sales would have raised $2bn over the next 20 years.

Source: Agencies