(Adds details, background and quotes from analyst)
By Dave Graham
MEXICO CITY, March 9 (Reuters) - A Mexican drug lord who was falsely reported dead more than three years ago was killed by the armed forces in western Mexico early on Sunday, the government's second major victory in its fight against organized crime in as many weeks.
Known as "El Mas Loco," or "The Craziest One," Nazario Moreno led a violent drug cartel that has ravaged the western state of Michoacan. The previous government said Moreno was killed in a firefight in December 2010, but his body was never found and he was widely believed to have survived.
Having discovered Moreno was still alive and leading the Knights Templar drug gang, Mexico's armed forces set about tracking down the kingpin inside Michoacan, government security spokesman Alejandro Rubido told a news conference.
On Sunday morning, members of the army and navy found Moreno in Tumbiscatio, a village in Michoacan about 50 km (30 miles) north of the port of Lazaro Cardenas, and shot him dead in a gunfight when he refused to turn himself in, Rubido added.
Raul Benitez, a security expert at the National Autonomous University of Mexico (UNAM), said the death of Moreno, who the government said had been the undisputed boss of the Knights Templar, would shore up support for the government's efforts.
But Benitez said that to convince the public, the government had to go after the man who has been the face of the gang since Moreno first "died", Servando Gomez, also known as the "La Tuta", as well as his lieutenant Enrique Plancarte.
"The government has to capture La Tuta to claim success," said Benitez. "(Moreno's death) is a success, but it's not the whole game of football. It's a goal scored in the first half. Plancarta and La Tuta are still missing," he added.
Having recovered the body this time around, the government said it had identified Moreno using fingerprints it had from his military service, security spokesman Rubido said.
Moreno's death is a boon for President Enrique Pena Nieto, who has sent hundreds of extra troops to Michoacan and appointed a special commissioner to oversee the state after admitting the government had lost control of parts of it to organized crime.
The Knights Templar had much of Michoacan in its power until local vigilante groups rose up against the cartel at the start of this year and began to overrun its strongholds.
The government has formed an uneasy alliance with the vigilantes to bring the Knights Templar to heel, but fears that the so-called self-defense groups have been penetrated by organized crime created doubts about Pena Nieto's strategy.
Pena Nieto took office pledging to restore stability to Mexico, where more than 85,000 people have died in cartel-related violence since his predecessor Felipe Calderon launched a military crackdown against the gangs at the end of 2006.
Bit by bit, Pena Nieto has started to deliver results, and two weeks ago marines captured the country's most wanted drug baron, Joaquin "Shorty" Guzman.
Rubido said a series of raids and arrests in the last few weeks had helped the government to track down Moreno, who initially led a drug cartel known as La Familia.
The gang fractured after his reported demise in 2010, and the most powerful faction of La Familia then renamed themselves the Knights Templar after a medieval military order. The Knights set up shrines to Moreno in Michoacan venerating him as a saint.
Moreno was born in 1970 in an unruly part of Michoacan known as the "Tierra Caliente," or hot country, where traffickers have long grown marijuana and poppies to make opium.
Working as a laborer in the United States in the 1980s, Moreno converted to evangelical Christianity, and on his return home, he spread his version of the gospel within the drug trade.
In 2006, Moreno named his cartel "La Familia Michoacana" and in ads printed in newspapers claimed his troops were good Christians who defended their kind even if they smuggled drugs.
La Familia was given a boost by the growing crystal methamphetamine trade, with smugglers bringing in precursor chemicals to Michoacan's Pacific port of Lazaro Cardenas.
The Knights Templar took a firm hold of Lazaro Cardenas and would go on to export iron ore from the port to China.
Federal police first caught up with Moreno in 2010, when he was handing out Christmas presents of washing machines and cars in a festival in the Michoacan village El Alcalde.
Police who took part in the attack against Moreno said the 2,000 officers involved in the operation ran into hundreds of gunmen who blocked roads with burning cars and trucks.
Five officers were killed, and police shot dead more than 50 gunmen in fighting lasting several hours, police said. The gang carried many of those hit, including Moreno, into the hills. (Additional reporting by Simon Gardner and Julia Symmes Cobb; Editing by Paul Simao, G Crosse, Eric Walsh and Mohammad Zargham)