Panama and China announced they were establishing diplomatic relations, as the Central American nation became the latest to dump Taiwan for closer ties with the world's second-largest economy.

The move prompted an angry response from Taiwan and will likely further strain ties between Taipei and Beijing, which considers the self-ruled island a renegade province awaiting reunification with the mainland. Taiwan is recognized by around 20 countries worldwide and its status is one of the most politically sensitive issues for Chinese leaders who pressure trade partners to accept its "one China" principle.

The two countries issued a joint statement saying: "In light of the interests and wishes of both peoples, the Republic of Panama and People's Republic of China have decided to grant each other, from the date of this document's signing, mutual recognition, establishment of diplomatic ties at the ambassadorial level."

Chinese Foreign Minister Wang Yi and his Panamanian counterpart Isabel Saint Malo de Alvarado signed the communique in Beijing.

"This is a historic moment, China-Panama relations have opened a new chapter," Wang said, adding that Panama's decision was in "complete accordance" with its people's interests and "in keeping with the times".

The announcement comes after Beijing began construction last week of a container port, with natural gas facilities, in Panama's northern province of Colon.

Panama had long stressed it had diplomatic ties with Taipei and commercial ones with Beijing. Chinese ships, after those from the United States, are the number two users of the Panama Canal, the Central American country's main source of budget revenue.