This is the most common and most important psychological effect. Battles are often won or lost because an army panics and flees, even though it may not have been beaten in combat. Troops who see their friends run can easily lose their nerve and flee themselves, causing other troops to lose heart until the whole army is fleeing in blind panic.
A unit must make a Panic test in the following circumstances:
Fleeing friendly unit is within 4" at the start of the turn.
Friends within 6" break from close combat or are destroyed.
The unit is charged in the side or rear whilst engaged in combat.
Fleeing friends are destroyed by chargers who are within 4".
The unit suffers 25% casualties from shooting or magic.
A unit is wiped out by shooting or magic within 4".
Note that most Panic tests are taken at the end of each phase, and you only need to take one Panic test per unit in each Shooting, Close Combat or Magic phase, etc, even if there are multiple reasons to take Panic tests.
Fleeing friendly unit within 4" at the start of the turn
A unit must test at the start of its turn if there is one or more units of fleeing friends within 4". However, the unit does not have to test if its Unit Strength is equal to or higher than the combined Unit Strengths of all fleeing friendly units within 4". For example, a unit of 20 Spearmen does not have to test if a unit of five cavalry is fleeing past them. However, if the cavalry unit was 12 strong, the Spearmen would have to test for panic as the Unit Strength of 12 cavalry is 24 (2x2=24).
Friends break from close combat within 6"
Test at the end of the Close Combat phase if one or more friendly units break within 6" as a result of being defeated in close combat. Measure from the closest point of the broken unit. In order to avoid confusion between units which are fleeing from combat and units which are fleeing as a result of panic, work our all combat results first and then take all resultant Panic tests. A unit only needs to take one Panic test on account of breaking friends in each Close Combat phase, regardless of how many units of friends break within 6". The same test must also be taken if a friendly unit within 6" is destroyed in close combat, unless it is a single model with less than 5 Wounds on its original profile, in which case no test is necessary. Although a unit which is destroyed cannot be broken as it no longer exists, its destruction is still extremely unnerving for friends nearby!
Charged in the side or rear while engaged in combat
A unit must test if it is fighting in close combat at the beginning of the turn, and is charged in the side or rear by an enemy unit with a Unit Strength of 5 or more. Make the test as soon as the charge is declared and determined to be within reach. No test is required if the charging unit is unable to reach its target unit.
Fleeing friends destroyed by chargers within 4"
If a friendly unit flees from a charge and is caught and destroyed then all friendly units within 4" of the final position of the fleeing troops must take a Panic test once all charges are complete but before close combat starts.
No test is needed if the unit outnumbers it's destroyed friends, in the same way as described earlier in this section.
25% Casualties from shooting or magic
A unit must take a Panic test if it suffers 25% of its current number as casualties in the enemy's Shooting phase or Magic phase. Only a single test per Shooting or Magic phase is required, and all the tests are taken at the end of the current phase. Example: A unit of 12 models must test if it suffers three or more casualties from shooting.
War machines do not have to test if they lose one or more of their crew, and neither do ridden monsters if they lose their rider, or vice versa.
This test must also be taken by a charging unit if its enemies stand & shoot and inflict 25% casualties. This may result in the charging unit panicking before it contacts its target, in which case it has been forced to flee from the hail of arrows unleashed by the defenders.
This test must also be taken if the unit suffers 25% casualties from randomly moving enemies, magical effects or unusual terrain types as might be included as 'special rules' by the players. This is intended as a 'catch-all' to cover units that suffer high casualties from something other than normal close combat, shooting or magic. Some good examples include casualties inflicted by a crashing Gyrocopter, whirling Goblin Fanatics, or Squig Hoppers, which cause casualties as they move. These Panic tests are taken at the end of the phase.
Unit wiped out by shooting or magic within 4"
If a unit is wiped out by missile fire or magic, any friendly units within 4" of it must take a Panic test at the end of the phase, unless the destroyed unit is a single model with less than 5 Wounds on its original profile.