The two sides are at odds over who should pay for $1.6bn in cost overruns to build a third set of locks for the canal, the main part of the expansion of the 50-mile (80 km) cargo route that connects the Atlantic and Pacific oceans.
The impasse over the 100-year-old waterway could delay construction, which aims to double the canal's shipping capacity and bring in billions of dollars in new revenue for Panama.
Reuters interviews with people involved in the 2009 bidding for the contract, local officials and leaked diplomatic cables reveal their concerns that the Grupo Unidos por El Canal (GUPC) consortium would not be able to finish the job with a bid that was $1bn lower than its nearest rival.
The GUPC, led by Spanish company Sacyr, said the overruns were caused by problems including flawed geological studies carried out by the Panama Canal Authority (PCA), a semi-independent government entity that has managed the waterway since the United States transferred ownership to Panama in 1999. The PCA has rejected the GUPC's assertions.
A top Panamanian official close to the bidding process, who spoke on condition of anonymity due to the sensitive nature of the matter, said within months of the project being awarded, Sacyr executives were saying the work would not stay on budget.
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