(Updates with context throughout)
By Dave Graham
MEXICO CITY, March 9 (Reuters) - A Mexican drug lord who had been reported dead more than three years ago was killed in a shootout with federal forces in western Mexico early on Sunday, a government official said.
Nazario Moreno led a powerful criminal gang that has ravaged the western state of Michoacan, and was known as "El Mas Loco," or "The Craziest One."
He had been reported killed by the government in a firefight in December 2010, but his body was never recovered and he was widely believed to still be alive.
The government will confirm his death in a news conference later on Sunday, the official said, insisting on anonymity.
The death of Moreno marks another major victory for President Enrique Peña Nieto's government in its campaign to bring Mexico's powerful drug gangs to heel.
The country's most wanted drug baron, Joaquin "Shorty" Guzman, was captured last month.
On Sunday afternoon, newspaper La Voz de Michoacan published two grainy, bloodied headshots of a corpse it said was Moreno's.
The online photos were similar to existing images of Moreno, few of which have been published. Crime bosses have been known to change their appearance using plastic surgery.
The newspaper said the gunfight occurred in El Naranjo de Chila, a small village 40 km (25 miles) southwest of the city of Apatzingan, a longtime bastion of the Knights Templar drug cartel.
Moreno led a drug cartel known as La Familia, which fractured after his reported demise in 2010. Moreno's allies formed the most powerful faction of La Familia and renamed themselves the Knights Templar after a medieval military order.
The Knights Templar had much of Michoacan under its control until local vigilante groups rose up against it at the start of this year and began to overrun the gang's strongholds.
The government has formed an uneasy alliance with the vigilantes despite concerns that the so-called self-defense groups had themselves been infiltrated by organized crime.
A number of officials in Michoacan told Reuters earlier this year that Moreno had survived the 2010 shootout and continued to play a part in the activities of the Knights Templar.
A few days ago a top government official was asked about whether Moreno was dead or alive. "Proof that he is alive? Let me put it this way, there's no proof that he is dead," the official said, speaking on condition of anonymity.
Alfredo Castillo, the federal government's special commissioner for Michoacan, said this month the capture of a man believed to be a son of Knights Templar leader Servando Gomez had provided valuable intelligence to the authorities.
That information may have helped them track down Moreno.
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 adverts 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 rising crystal meth trade, with smugglers bringing in precursor chemicals to Michoacan's Pacific port of Lazaro Cardenas.
The Knights Templar took a firm hold on Lazaro Cardenas and would go on to export iron ore from the port to China.
Federal police caught up with Moreno in 2010, when he was handing out Christmas presents of washing machines and cars in a festival in El Alcalde, a village near El Naranjo de Chila.
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 the fighting which lasted several hours, police said. The cartel carried many of those hit, including Moreno, into the hills. (Additional reporting by Simon Gardner; Editing by Paul Simao, G Crosse, Eric Walsh and Mohammad Zargham)
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