Mr Perez Balladares said an internal audit of campaign records revealed he had "unwittingly" received $51,000 (pounds 33,000) from a company headed by Colombian drug lord Jose Castrillon Henao. Castrillon was recently jailed in Panama on charges that he headed the Cali cartel's sea-going cocaine exports to the US.
Ernesto Samper, president of Colombia, was cleared last week by parliament, which his party controls, of knowingly accepting Cali cartel cash for his 1994 campaign. Prosecutors insist, however, that several million dollars of drug money did help fund his campaign, whether Mr Samper knew it or not.
Although the amount admitted by Mr Perez Balladares was a small percentage of his campaign funds, his admission was seen as highly significant and possibly aimed at heading off increasing reports that his government was and is tainted by Colombian drug money.
US officials had expressed concern over the reports, not least in the light of the fact that American troops are due to leave Panama at the end of 1999. On the last day of that year, Panama is due to take control of the Panama Canal from the US, which it has controlled since the start of the century.
Mr Perez Balladares was along-time friend and aide of Manuel Antonio Noriega, the army general who ruled Panama until the US, under President George Bush, ousted him by invading in 1989. Many Panamanians who despised General Noriega were surprised at Mr Perez Balladares's election victory two years ago at the head of the Democratic Revolutionary Party, which Gen Noriega always supported.
The President's admission was apparently the direct result of a recent report in The Economist which hinted that his government was tainted by Colombian drug money. Government sources said Mr Perez Balladares had ordered the audit of his campaign funding because he was planning to sue the British magazine. Instead, he will drop the suit, the sources said.
Mr Perez Balladares said the audit had turned up two cheques, endorsed by him, from a company believed to have been owned by Mr Castrillon. He said he could not remember endorsing them and had no idea at the time that Mr Castrillon was involved in trafficking drugs.
Mr Castrillon operated a tuna-fishing fleet in Panama until he was arrested on 16 April Prosecutors say the fleet was a cover for the Cali cartel's sea-going cocaine exports to the US, worth billions of dollars. He is in jail awaiting trial.
"This is the first time, perhaps in my life, that I have to swallow my words," Mr Perez Balladares said. "I am a proud person. It hurts that there was this type of money in my campaign. I have nothing to hide."
He said that his campaign records would be made available to the Attorney- General for "an urgent and exhaustive investigation."