[also called Panamanian Revolution]

After considerable debate, the United States decided to build a canal through Panama rather than Nicaragua, and the U.S. Congress's Spooner Act of 1902 authorized the U.S. president to buy the assets of the French company. Following up on this, Bunau-Varilla pressured Colombia to negotiate the Hay-Herrán Treaty of 1903, which would have allowed the United States to control a strip of land surrounding the projected canal. The Colombian senate, however, rejected the treaty.

Bunau-Varilla then turned to a group of Panamanian revolutionaries who were uniting in opposition to the Colombian government's rejection of the canal treaty, its requisitions of property, and its impressment of Panamanian men during a civil war. On November 3, 1903, a revolutionary junta proclaimed Panamanian independence. Colombian forces were sent to crush the rebellion, but they were mired at Colón because the U.S.-administered railroad had strategically removed its trains from the northern terminus. U.S. naval forces also deterred reinforcements that were sent from Bogotá by land. The secessionist junta appointed Bunau-Varilla minister to Washington, D.C., with full powers to negotiate treaties. On November 18, 1903, he and U.S. Secretary of State John Hay signed the Hay-Bunau-Varilla Treaty. By this treaty the United States obtained, in perpetuity, the exclusive use, occupation, and control of the Canal Zone, a strip 10 miles (16 km) wide (5 miles on each side of the waterway). Formal acquisition of the lands took place on May 4, 1904.

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The War of a Thousand Days left the country too weak to prevent Panama's secession from the republic in 1903. The events leading up to Panama's secession were as much international as domestic. At the turn of the century, the United States recognized the strategic need to have access to a naval route connecting the Caribbean Sea and the Pacific Ocean, such as a canal in the isthmus. The HayHerrán Treaty of January 1903, which was to have been the basis for allowing the United States canal project to proceed, was rejected by the Colombian Congress. Because the proposed Panamanian route was preferred over the Nicaraguan alternative, the United States encouraged the Panamanian separatist movement, militarily assisted Panama in its movement for independence, and immediately recognized the independent Republic of Panama.