PANAMA CITY (AFP) - The Panama Canal authority said on Thursday it will impose a fine of as much as US$1 million (S$1.27 million) on the North Korean freighter caught with an undeclared shipment of Cuban weapons.

"It is a flagrant violation of safe passage through the Panama Canal and we have little tolerance for this kind of activity," canal administrator Jorge Quijano said.

"It is going to be sanctioned," he said, adding that the authorities were still mulling the size of the fine.

"It's obvious that there were containers that had not been declared, not to mention what was inside them." The ship, the Chong Chon Gang, was boarded and searched July 10 on suspicion it was smuggling drugs.

The authorities instead uncovered 25 containers of military hardware, including two Soviet-era MiG-21s, air defense systems, missiles and command and control vehicles, buried under tons of sugar.

Havana said they were obsolete Cuban arms being shipped to North Korea for refurbishment under a legitimate contract.

A team of United Nations experts is in Panama to inspect the weapons and determine whether the shipment violated a UN ban against arms transfers to North Korea.

Mr Quijano said fines imposed by the canal authority range from US$10,000 to US$100,000 for serious violations and up to US$1 million for "very serious" violations.

"The case of the North Korean freighter is very serious," he told AFP.

Warships and ships carrying military or nuclear material routinely go through the canal, allowed passage even at times of war.

The only requirement is that the canal authorities be given prior notice so that local authorities can take appropriate security precautions.

With 5 per cent of the world's trade passing through it, the canal is a strategically important chokepoint requiring tight security procedures.

Only four North Korean flagged vessels have transited at the 80km canal in the past two years.