Luna’s Castle (Calle 9 Este and Avenida Eloy Alfaro, tel. 262-1540, http://lunascastle.com, US$12 in dorms, US$28 s/d in private rooms, breakfast included) opened in 2008 and has quickly become the Hilton of Panama’s hostels. It’s owned by the same guys who made Mondo Taitu and Hostel Heike in Bocas popular.

Luna’s Castle is in a lovely three-story colonial house with high ceilings and ornate balconies. French doors on the 2nd and 3rd floor open onto million-dollar views of Casco Viejo, Panama Bay, and the downtown skyline. Original fixtures include tile floors and a handsome wooden staircase. On the ground floor is Relic Bar, a Casco Viejo hotspot that is open to all.

For security in the evening, only hostel guests with wristbands are allowed upstairs into the hostel itself. The wristbands also entitle guests to discounts at some area restaurants. In the back, the hostel faces dilapidated buildings that are still very much occupied by the poorer families of Casco Viejo; a friendly greeting will almost certainly be warmly returned.

The hostel has both dorms and private rooms. One dorm has four beds. The rest have 6–12 beds. All are mixed sex. Dorm rooms 7, 10, and 12 have ocean views. Number 10 is the most spacious. There are seven private rooms. A movie theater (!) downstairs shows current releases to hostel guests, who can recline on three tiers of mattresses that serve as stadium-style seats.

There’s a lounge area, table tennis, and computers with free Internet access, as well as free Wi-Fi for those with their own electronic gizmos. The included breakfast consists of (make-your-own) pancakes, bananas, coffee, and tea. The hostel also occasionally hosts art exhibitions and other cultural events.

Luna’s Castle has a fat binder that contains up-to-date information for budget travelers on where to go and how to get around in Panama City and other backpacker destinations. The hostel also has maps of Casco Viejo and the rest of Panama City. They can help make arrangements for stays in other parts of Panama, including land transits to Kuna Yala.

Guests have access to lockers, free luggage storage, a book exchange, a communal kitchen, and local and international calling. One of the managers is a massage therapist who offers on-site massages. She even gives haircuts.

In short, this place is frickin’ impressive. It’s my first choice for budget travelers who want to spend time exploring Casco Viejo, meet other travelers, and get help with onward travel. On the other hand, it’s a big, self-contained backpacker enclave and it’s not terribly convenient to other parts of the city. Travelers who want to meet locals and see other parts of the city on the cheap may find it easier to stay in more centrally located places such as Mamallena, Pension Las Torres, or La Jungla.

Note: Guests need to be especially careful in this part of Casco Viejo. The hostel is at the entrance to the old town, at the top of a ramp leading up from the rough streets of the Terraplén, which is deserted at night since the old public market was torn down. Please do not walk through this area at night; splurge on a taxi. However, the area around the hostel should be safer than most parts of Casco Viejo because it’s directly across from a house patrolled by guards and just down the street from the presidential palace, which bristles with armed police.

There is a security gate and a night security guard. There’s one especially nice touch for prospective guests who arrive in the middle of the night: The security guard will admit you and let you crash on the movie-theater mattresses. You can check into the hostel in the morning when the staff arrives.

Opened in 2005, Hospedaje Casco Viejo (Calle 8 and Avenida A, tel. 211-2027, www.hospedajecascoviejo.com, starts at US$10) offers 16 rooms in an old three-story house behind the Iglesia de San José (Church of the Golden Altar). All the rooms have ceiling fans only. Rates are US$10 per person in dorm rooms, US$18 s/d in a private room with shared bathroom. None of the bathrooms have hot water. Some of the bedrooms have balconies. There’s a tiny interior patio and a TV room for hanging out, a shared kitchen, a gated entrance with 24-hour reception, free wireless Internet, and lockers. With just a little bit of work this place could be great, but as of now it tends to the grungy side. In any case, the location can’t be beat. The hostel can arrange airport pickup for US$20.