The lake was created between 1907 and 1913 by the building of the Gatun Dam across the Chagres River. At the time it was created, Gatun Lake was the largest man-made lake in the world, and the dam was the largest earth dam.
The lake is situated in the valley of the Chagres River. It was formed, and the river widened and deepened, by the construction of the Gatun Dam about 10 km (6 miles) from the river's mouth in the Caribbean Sea in 1907–1913. The geography of the area was ideal for the creation of a large lake here; the hills bordering the valley of the Chagres open up widely around the area of the lake, but come together to form a gap just over 2 km (1.4 miles) wide at the location of the dam. The damming of the river flooded the originally wooded valley; almost a century later, the stumps of old mahogany trees can still be seen rising from the water, and submerged snags form a hazard for any small vessels that wander off the marked channels.
Gatun Lake has an area of 425 km² (164 square miles) at its normal level of 26 m (85 ft) above sea level; it stores 5.2 cubic kilometres (183,000,000,000 ft³) of water, which is about as much as the Chagres River brings down in an average year.
Gatun Lake forms a major component of the Panama Canal; the lake, including the flooded arm extending up the Chagres River, makes up 32.7 km (20.3 miles) of the raised part of the waterway, the other part being the 12.6 km (7.8 miles) Gaillard Cut.
The canal follows a clearly marked route around the lake's islands, following the deeper water south from Gatun Locks, and then east. A small "shortcut" channel, the "Banana Cut", runs between the islands, providing a slightly shorter route through the lake; this is used by canal launches and yachts to cut a little time off the crossing, and to avoid the heavy ship traffic.
The lake is also important as a reservoir of water for the operation of the canal locks. Each time a ship transits the canal, 202,000 m³ (53 million U.S. gallons) of water is passed from the lake into the sea; with over 14,000 vessel transits per year, this represents a very large demand for water. Since rainfall is seasonal in Panama, the lake acts as a water store, allowing the canal to continue operation through the dry season.
A major factor in water regulation is the ability of the rainforest in the lake's watershed to absorb rainfall, releasing it gradually into the lake. However, significant deforestation of the watershed has cleared away much of the vegetation, and reduced the area's water capacity. This has resulted in falling water levels in the lake during the dry season. Coupled with the massive increase in canal traffic since its opening, and the resultant increase in water usage, this is an ongoing problem for the canal (see Panama Canal: Water issues).