(Adds background, details on how Moreno was tracked down)
By Dave Graham
MEXICO CITY, March 9 (Reuters) - A Mexican drug lord who had been falsely reported dead more than three years ago was killed in a shootout with federal forces in western Mexico early on Sunday, the government 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 be still alive.
Government security spokesman Alejandro Rubido said after security forces discovered Moreno was still alive, he was tracked down and found to be the undisputed leader of the main drug cartel operating in the area, The Knights Templar.
"This morning, he was intercepted," Rubido said. "When he was asked to turn himself in, he opened fire and was killed."
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.
Officials said the identity of Moreno, who was killed near Tumbiscatio, a village about 50 km (30 miles) north of the port of Lazaro Cardenas, was confirmed via fingerprints.
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.
Rubido said a series of raids and arrests in the last few weeks had helped the government to 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 advertisements 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; Editing by Paul Simao, G Crosse, Eric Walsh and Mohammad Zargham)