Rumors and lies are typically organic and viral. Typically, there's no organized campaign with funding and muscle. Instead, it's usually fueled by water-cooler gossip, e-mail chains and other person-to-person contact.
Propaganda is different. It's an organized effort to manipulate the public using mass media, including censorship, misinformation, half-truths and lies.
Propaganda relies on images and emotions, especially fear.
The easiest examples of propaganda come from government efforts during wars, with the most famous being posters during World War I and World War II.
A big problem in war is making the population -- especially civilians drafted into soldiers -- see the enemy as something less than human.
Many soldiers can't overcome the cultural and moral prohibitions against shooting and killing other human beings, even when they're being shot at themselves.
Thus the nicknames given to enemies in almost every war, and the posters showing the enemy soldiers as resembling rats or monsters.
Propaganda works by tapping into emotions through images, slogans and a selective use of the facts -- or control and censorship of the facts, especially if propaganda is being utilized by a government that is controlling the media by censorship or owns the media outright.
It's not always a state or institution that uses propaganda.
Corporations, non-profits and political campaigns will sometimes be tempted into using these techniques, so you need to know how to counter them.