A lighted panel system for a tub wall comprising a light diffusing panel, a light source that illuminates the light diffusing panel, and a mounting structure that couples the light diffusing panel to the tub wall. The light diffusing panel comprises a formed transparent or translucent sheet to which the light source is mounted. The light source comprises a plurality of light emitting diode lamps mounted on a circuit board protected by a circular rubber boot that attaches to a rear surface of the light diffusing panel such that light rays are dispersed in a principally lateral direction, parallel to the wall of the tub. A plurality of the lighted panel systems are preferably installed side by side along the length of a tub wall at the water line, an arrangement that allows for continuous lighting coverage and creates a new ambient effect.