During the 1980s the Reagan administration sponsored an anti-Sandinista guerilla movement known as the Contras (a proxy paramilitary based in Honduras and Costa Rica, largely consisting of northern highlanders known as the Milpas and led by former Somoza regime soldiers) against the socialist Sandinista government in Nicaragua. The resulting war killed over 50,000 people, mostly civilians.
Under the Carter Administration, the Sandinistas had received tacit U.S. support in their coup against the previously U.S.-backed right-wing military dictatorship of the Somoza dynasty, which had ruled the country for several decades. An interim coalition, Junta, took power in 1979 and in 1984 leader of the FSLN party, Daniel Ortega became Nicaragua's first elected President who ruled under the name of the Sandinista revolution. As the years progressed, the Ortega government was accused of becoming more authoritarian, with the more moderate factions of the coalition being expelled from government. Allegations of suppression of political dissent increased, as did accusations of state-sponsored human rights abuses. However, these accusations of human rights abuses were not accurate, according to Human Rights Watch: "Almost invariably, U.S. pronouncements on human rights exaggerated and distorted the real human rights violations of the Sandinista regime, and exculpated those of the U.S.-supported insurgents, known as the contras."  As well, Ortega was a supporter of Fidel Castro's Cuba and many members of the Sandinista government sought to model Nicaragua along similar lines. Cuba sent doctors and technicians to Nicaragua and the Soviet Union shipped some military equipment, including some Hind helicopters.
The leftist nature of the Sandinista government and its support for Cuba distressed many in the Reagan administration, who viewed the country as a key Cold War battleground, in danger of becoming a Communist proxy state. As a result, covert support began to flow to the anti-Sandinista Contra rebels, whom Reagan had described as "the moral equal of our founding fathers."
Under the direction of the CIA, the largest Contra army, the FDN, attacked collective farms and other civilian targets, as well as murdered, tortured and mutilated civilians and committed other war crimes, as documented by human rights organizations such as Amnesty International and Human Rights Watch.  The Contras were also accused of being involved in illicit drug-trafficking. In 1986 a CIA-written training manual detailing methods of terrorism and assassination was discovered to have been issued to the Contras.
The proxy army followed Washington orders to attack "soft targets" such as farm cooperatives and health clinics instead of "trying to duke it out with the Sandinistas directly," and to "attack a lot of schools, health centers, and those sort of things" so that "the Nicaraguan government cannot provide social services for the peasants, cannot develop its project" as explained by General John Galvin, commander of the U.S. Southern Command, who added that with these tactics, aimed at civilians lacking means of defense against armed terrorist bands, prospects for the contras should improve.
When asked in the US Congress in April 1985 to define US policy in Nicaragua, former CIA Director Stansfield Turner responded "state-sponsored terrorism".
The World Court would find that this constituted state sponsorship of terrorism and an attempt to overthrow an elected government. Nicaragua decided to take their case to the World Court in Nicaragua v. United States. In an unprecedented decision in the history of world justice, the World Court sanctioned the U.S. for "unlawful use of force" for "sponsoring paramilitary activity in and against Nicaragua", ordering the U.S. government to pay billions of U.S. dollars in compensation. The World Court ordered Reagan to terminate his campaign, but the Reagan White House dismissed the ruling and then vetoed two Security Council resolutions affirming the Court ruling and calling on all nations to observe international law. The FSLN then took its case to the General Assembly and the General Assembly ruled in its favor, with only the US, Israel, and El Salvador dissenting. Father Miguel D'Escoto, Foreign Minister under the Sandinista government, supposes that the U.S. owes his country between 20 and 30 billion U.S. dollars. 
Reagan and United Kingdom Prime Minister Margaret Thatcher at Camp David
Many, who supported the Reaganite view, claim the Sandinista regime was neither democratic nor harmless, but rather a Communist dictatorship in the making, supported both militarily and economically by Cuba and the Soviet Union. The administration refused to participate in the World Court proceeding.
Due to the pressures of the covert Contra war, the Sandinista President of Nicaragua, Daniel Ortega, eventually held the country's second elections, which he and his party lost, thus ending Nicaragua's brief period of socialist rule. Violeta Barrios de Chamorro, a former Junta member who led a 19-party "anti-Sandinista" alliance was elected in his place.
Through its desire to combat leftist governments and Marxist insurgencies in the region the Reagan administration was accused of sponsoring right-wing military dictatorships throughout Latin America. The CIA and U.S.-based School of the Americas, similarly were accused by some as having trained Honduran and other Latin American military officers and future death squad paramilitary members in torture and assassination techniques to fight insurgencies.
Reagan increased funding to many other Central and South American states throughout his two terms. Financial aid to Colombia's military and right-wing paramilitary groups skyrocketed in the eighties, even as Colombia compiled one of the worst human rights records in the hemisphere. A similar situation existed for El Salvador. Congress attempted to put constraints on aid to the government of El Salvador and make it contingent on human rights progress. Even as tens of thousands of civilians were slaughtered by government and governmentally-allied forces in the early eighties Reagan stated that El Salvador was making "progress." Elliott Abrams, an administration official indicted in the Iran Contra Affair, also denied the existence of human rights violations and massacres in El Salvador like the El Mozote massacre. When congress tried to renew the human-rights stipulation to aid for El Salvador Reagan vetoed the bill.
This pattern of funding right-wing military and paramilitary groups would continue in Guatemala. In 1999 a report on the Guatemalan Civil War from the UN-sponsored Commission for Historical Clarification stated that "the American training of the officer corps in counter-insurgency techniques" was a "key factor" in the "genocide...Entire Mayan villages were attacked and burned and their inhabitants were slaughtered in an effort to deny the guerillas protection." According to the commission, between 1981 and 1983 the Guatemalan government—financed and trained by the US—destroyed four hundred Mayan villages and butchered 200,000 peasants (1).
In Panama this funding was more covert. Manuel Noriega, the dictator of Panama, was on the payroll of the CIA as of 1967. By 1971 his involvement in the drug trade was well known by the DEA but he was an important asset of the CIA and so was well-protected. CIA Director George H. W. Bush arranged to give Noriega a raise in 1976 to a six-figure salary. The Carter administration dropped the future dictator from its payroll but he was reinstated by the Reagan administration and his salary peaked in 1985 at $200,000 (2). Noriega allowed CIA listening stations in his country, provided funding for the Contras, and protected covert U.S. and U.S.-funded air shipments of supplies to the Contras(3).
Reagan offered controversial support to the rightist El Salvador government throughout his term; he feared a takeover by the FMLN during the El Salvador Civil War which had begun in the late 1970s. The war left 75,000 people dead, 8,000 missing and one million homeless; some one million Salvadorans, fleeing the war and government backed right-wing death squads, immigrated to the United States. He backed attempts at introducing democratic elections with mixed success.