Panay is one of six small river gunboats that had been built in 1927 to protect American commerce and interest on the Yangtze River in China. The Panay, along sister ships Guam, Luzon, Mindanao, Oahu and Tutuila were part of the Yangtze River Patrol of the United States Navy's Asiatic Fleet assigned to guard against pirates attacking commercial shipping along the river. .
As Japanese forces approached Nanking in late November 1937, the Chinese foreign Ministry notified American diplomats that they would need to evacuate. While the Ambassador and most of his staff left on November 22nd aboard the USS Luzon, several personnel had been assigned to stay as long as possible. After a week, the remaining staff had decided it was time to evacuate and boarded the USS Panay for the trip down river. On December 1st, the American Ambassador Grew notified the Japanese government that the gunboat would embark from Nanking on December 11th along with three Standard Oil barges.
At approximately 11:00 am on December 12th, the Panay along with the three tankers she was escorting anchored near Hoshien. Because the United States was neutral in the conflict between Japan and China, American flags were raised on all ships and painted on the awnings for identification purposes. Because of their belief in neutrality, the crew had not manned or even uncovered the guns on deck and ate dinner in the clear, sunny Sunday afternoon. Shortly after 1:30 pm three Japanese Navy bombers flew overhead and dropped bombs on the anchored vessels, damaging the Panay and injuring her Captain and several other seamen.
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Immediately following the encounter twenty dive-bombers and fighters attacked, sinking the Panay and two of the three oil barges. While survivors attempted to make their way to shore, the Japanese fighters strafed them. A total of two seamen and one civilian were killed and eleven officers and men of the Panay were seriously wounded.
