Nicaragua's powerful President Zelaya began to support exiled Honduran liberals in their efforts to topple Manuel Bonilla, who had become, in effect, the Honduran dictator. Supported by elements of the Nicaraguan army, the exiles invaded Honduras in February 1907 and established a provisional junta. With the assistance of Salvadoran troops, Manuel Bonilla tried to resist, but in March his forces were decisively beaten in a battle notable for the introduction of machine guns into Central American civil strife...

By 1907 the United States looked with considerable disfavor on the role Zelaya of Nicaragua was playing in regional affairs. When the Nicaraguan army entered Honduras in 1907 to overthrow Bonilla, the United States government, believing that Zelaya wanted to dominate the entire region, landed marines at Puerto Cortés to protect the North American bananas trade. Other United States naval units prevented a Nicaraguan attack on Bonilla's last position at Amapala in the Golfo de Fonseca. After negotiations conducted by the United States naval commander, Manuel Bonilla sought refuge on the U.S.S. Chicago, and the fighting came to an end. The United States chargé d'affaires in Tegucigalpa took an active role in arranging a final peace settlement, with which Zelaya was less than happy. The settlement provided for the installation of a compromise regime, headed by General Miguel Dávila, in Tegucigalpa. Dávila was a liberal but was distrusted by Zelaya, who made a secret arrangement with El Salvador to oust him from office. This plan failed to reach fruition, but the United States, alarmed by the threat of renewed conflict in Central America, called the five Central American presidents to a conference in Washington in November.

The Central American Peace Conference of 1907 made a major effort to reduce the level of conflict within the region. A Honduran proposal to reestablish the political union of the Central American states failed to achieve acceptance, but several other measures were adopted. The five presidents signed the General Treaty of Peace and Amity of 1907 pledging themselves to establish the Permanent Central American Court of Justice, which would resolve future disputes. The treaty also committed the five countries to restrict the activities of exiles from neighboring states and provided the basis for legal extraditions. Of special interest was a United States-sponsored clause that provided for the permanent neutrality of Honduras in any future Central American conflicts. Another convention adopted by all five states committed the signers to withhold recognition from governments that seized power by revolutionary means. The United States and Mexico, which had acted as cosponsors of the conference, indicated informally that they would also deny recognition to such governments. From the point of view of the United States Department of State, these agreements represented a major step toward stabilizing Central America in general and Honduras in particular.