USS Panay ( PR - 5 ) The second USS " Panay " ( PR – 5 ) of the United States Navy was a river gunboat that served on the Yangtze Patrol in China until sunk by Japanese aircraft on 12 December 1937 on the Yangtze River . The vessel was built by Kiangnan Dockyard and Engineering Works , Shanghai , China , and launched on 10 November 1927 . She was sponsored by Mrs . Ellis S . Stone and commissioned on 10 September 1928 , with Lieutenant Commander James Mackey Lewis in command . Service history . Built for duty in the Asiatic Fleet on the Yangtze River , " Panay " had as her primary mission the protection of American lives and property frequently threatened in the disturbances that the 1920s and 1930s brought to a China struggling to modernize , create a strong central government , and later counter Japanese aggression . Throughout " Panay ’ s " service , navigation on the Yangtze was constantly menaced by bandits and soldier outlaws , and " Panay " and her sister ships provided protection for American shipping and nationals , as other foreign forces did for their citizens . As the Japanese moved through South China , American gunboats evacuated most of the Embassy staff from Nanking during November 1937 . " Panay " was assigned as station ship to guard the remaining Americans and take them off at the last moment . They came on board on 11 December and " Panay " moved upriver to avoid becoming involved in the fighting around the doomed capital . Three American merchant tankers sailed with her . The Japanese senior naval commander in Shanghai was informed both before and after the fact of this movement . Sunk by the Japanese . On 12 December 1937 , Japanese naval aircraft were ordered by their Army to attack " any and all ships " in the Yangtze above Nanking . Knowing of the presence of " Panay " and the merchantmen , the Imperial Japanese Navy requested verification of the order , which was received before the attack began about 13 : 27 that day . Although there were several large American flags flown on the ship under the command of Lt . Commander James J . Hughes , as well as one painted atop the cabin , the Japanese planes continued strafing and bombing . " Panay " was hit by two of the eighteen bombs dropped by three Yokosuka B4Y Type - 96 bombers and strafed by nine Nakajima A4N Type - 95 fighters . The bombing continued until the " Panay " sank at 15 : 54 . Three sailors were killed , with 43 sailors and five civilian passengers wounded . Two newsreel cameramen were present on " Panay " , Norman Alley ( Universal News ) and Eric Mayell ( Movietone News ) , and were able to take considerable film during the attack and afterward from shore as the " Panay " sank in the middle of the river . The newsreels are now available online at usspanay . org ( see external links below ) . A formal protest was immediately lodged by the American ambassador . The Japanese government accepted responsibility , but insisted the attack was unintentional . They claimed that the pilots could not distinguish between Chinese and American flags from the distance of 300 or more yards that the pilots attacked . A large indemnity was paid ( approximately $ 2 , 000 , 000 , which is equal to $ today ) on 22 April 1938 and the incident officially settled . However , further deterioration of relations between Japan and the United States continued . Fon Huffman , the last survivor of the incident , died in 2008 .