Terrified locals in Cerro Azul were running scared after the creature they describe as “Gollum” crawled out of a lake and charged schoolkids, reports The Sun.
It was spotted on Saturday when four 14 to 16-year-olds were playing by the waterfront, according to Panamanian news service Telemetro.
The hairless creature has been described as having rubbery skin and measuring almost 150cm.
The teenagers were said to have feared for their own safety as the creature moved towards them so they picked up rocks and sticks and beat it to death, before throwing its corpse in the water and running away.
The youths tossed the carcass into a nearby lake but later returned to take photographs, the report said.
Experts have yet to examine the images. However, locals told Panama news channels that the water-monster was “Gollum from Lord of the Rings”.
One said: “I have only seen that creature once before - and it was in the Tolkien film.”
The fictional Gollum - originally known as Smeagol - was a hobbit whose later name was derived from the “disgusting gurgling, choking cough he made”.
JRR Tolkien - who wrote the Middle Earth adventures - said of the character: “He had become deformed and twisted in both body and mind by the corruption of the Ring.
“His only desire was to possess the Ring which had enslaved him, and he pursued it for many years after he lost it.”
Internet speculation centres around whether the “monster” is actually a shaved sloth or pit bull terrier.