| VALLECILLO, Mexico
VALLECILLO, Mexico Mexican government forces had bottled up a band of enemy fighters in this tiny village late last year, but feared they would escape into the dusty, rock-strewn hills. So more than 600 soldiers and federal police closed in from all directions with armored Humvees and helicopters.
The outlaws responded with a barrage of rocket-propelled grenades and AK-47 assault-rifle fire, tearing apart one federal police vehicle. For three days the fighting raged.
In the end, according to military accounts of the battle, 22 members of the Zetas drug cartel, two police officers and a soldier were dead, and 20 Zetas were in custody. Dozens more escaped to fight another day.
The battle could have been a scene from the war in Afghanistan, but it erupted just 45 miles south of the Texas border. It was only one of dozens like it in northeastern Mexico in recent months as soldiers, marines and police have engaged in a deadly cat-and-mouse game with roaming Zetas hit squads.
Formed in 1998 by 14 former Mexican soldiers, the Zetas have grown to command more than 10,000 gunmen from the Rio Grande, on the border with Texas, to deep into Central America. Their rapid expansion has displaced Mexico's older cartels in many areas, giving them a dominant position in the multi-billion-dollar cross-border drug trade, as well as extortion, kidnapping and other criminal businesses.
But it is bloodshed that has made the Zetas notorious. And feared.
Zetas killers have been arrested for some of the worst atrocities in Mexico's drug war, including the murders of hundreds of people whose bodies have been found in mass graves with alarming frequency, the massacre of 72 foreign migrant workers headed to the United States, and the burning of a casino that claimed 52 lives.
On Sunday, Mexican soldiers said they had arrested Daniel Elizondo, a Zetas leader known as "The Madman," as the alleged perpetrator of the massacre of 49 people whose corpses were decapitated, dismembered and dumped on a highway a week earlier. In the last month, the Zetas have also been linked to the decapitation of 18 people near Guadalajara and the hanging of nine in the border city of Nuevo Laredo. In those two cases, messages left at the scenes, signed by the Zetas, said the victims were rival traffickers.
Mexican and U.S. agents say the Zetas' paramilitary tactics -- based on small, roaming cells of armed operatives -- and indiscriminate violence are the driving forces behind a recent escalation in Mexico's drug war. That conflict, between government forces and the cartels and among the cartels themselves, has claimed about 55,000 lives in the past five years, including more than 3,000 police officers and soldiers.
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The Zetas pose a bigger challenge to the government than older cartels because of the intensity of their attacks against security forces, their disregard for civilian life and the murderous habits that break the unspoken codes of older traffickers. The brutality has made their heartland in northeastern Mexico a no-go area for many businessmen and tourists.
Mexican police officers and soldiers on the front lines say the Zetas have more in common with insurgents than traditional gangs. "The Zetas act like urban guerrillas," said Florencio Santos, a former soldier and now police chief in Guadalupe, a town on the southern outskirts of Monterrey. "They'll make a phone call to get the police out, then block the street in front of the patrol cars and open fire from the front and the side."
Drug agents say the goals of the Zetas also differ from Mexico's traditional smuggling families. While older cartels focused on trafficking routes and drug-producing areas, the Zetas move into any town or city where they can to carry out shakedowns and other crimes.
"The Zetas have created a new model of organized crime and unleashed new levels of violence to try and unseat the older cartels," said Mike Vigil, the former head of international operations for the U.S. Drug Enforcement Administration. "This has destabilized many areas of Mexico."
A report by Mexico's organized crime unit, SIEDO, found that the Zetas now control more territory than the nation's oldest and wealthiest trafficking organization, the Sinaloa Cartel, led by Joaquin "Shorty" Guzman. The report, leaked in January, says that while the Sinaloans operate in 16 of Mexico's 32 federal entities, the Zetas are in 17.
They are creeping into the United States, too. A grand jury in Laredo, Texas, in April indicted four alleged Zetas for conspiracy to murder and traffic drugs on U.S. soil. The charges follow another Laredo trial in January in which two alleged Zetas were found guilty on weapons and homicide charges.
Zetas gunmen are alleged by Mexican prosecutors to be behind the killing of U.S. customs agent Jaime Zapata in Mexico in 2011, the first American agent to be murdered on duty here since the 1980s. The U.S. government is offering a $5 million reward for the capture of the Zetas supreme commander, 37-year-old Heriberto Lazcano, alias "The Executioner."
The Zetas stronghold in northeastern Mexico, across the border from Texas, has become Mexico's most violent region. In Nuevo Leon state, home to the rich industrial city Monterrey and villages such as Vallecillo, there were more than 685 drug-related killings by mid-May, according to media tallies. This put it ahead of even Chihuahua state, with 560 gangland slayings and home to Mexico's previous murder capital, Ciudad Juarez, dominated by the Juarez Cartel.
Nuevo Leon can seem like a state under siege. Zetas graffiti mark the group's territory. Many local residents, aware that gang hit men regularly murder people accused of snitching, are too scared to help the police. Police and soldiers in Nuevo Leon say they move only in convoys of at least 30 troops because of the threat of Zetas ambushes, a precaution not needed in most of the rest of the country.
Guadalupe police chief Santos survived an ambush in September because the bullets didn't pierce his armored vehicle. "It was a terrifying moment," Santos said. "I thought the bullets might get through, but the vehicle held until reinforcements came."
Some of his fellow policemen weren't so lucky. Last year the Zetas murdered 13 of Guadalupe's 300 street officers and destroyed 48 patrol cars through such attacks. Santos and most of his officers now sleep inside a barracks for protection.
The Zetas are aided by an effective network of spies. These hawks, as they are called, are typically teenagers or young men and women paid about $600 a month, Guadalupe police say. In a country with a minimum wage of about $5 a day, that money can buy a lot of support.
When a Reuters reporter accompanied police in Guadalupe on a recent patrol, officers listened to a radio frequency used by the gangsters. Zetas hawks could be heard warning their cohorts about the convoy of police vehicles moving into a slum on the edge of Monterrey.
Santos, the police chief, said he fought Zapatista guerrillas when they took up arms in the southern state of Chiapas in 1994 to fight for the rights of indigenous people. The Zetas, he says, are a far deadlier foe. "The Zetas have much better training and better armaments than the Zapatistas did."
The Zetas' supreme leader, Lazcano, was born in 1974 in the village of Acatlan in Hidalgo state, the local birth registry shows. This community of cattle farms and corn plots more than 600 miles from the Mexico-U.S. border provides its youth with few opportunities. Many young men head north to enter the U.S. illegally, or they join the armed forces.
As a child, Lazcano moved with his family to the nearby city of Pachuca, settling in the working-class barrio of Tezontle, police say. The clutch of dusty streets and unpainted cinder-block houses lies next to a military base, where records show Lazcano enlisted with the Mexican army at age 17 to become an infantryman.
He was following in the footsteps of the founding Zetas, many of whom also came from central and southern Mexico and served in military divisions -- infantry, motorized cavalry, special forces -- whose regulars often received training from the U.S.
A 2009 U.S. diplomatic cable published by WikiLeaks shows that at least one Zeta, former infantry lieutenant Rogelio Lopez, trained at Fort Bragg in North Carolina. Declassified U.S. training manuals used for Latin American officers include sections on combat intelligence and use of informants, both strong points of the Zetas.
Lazcano deserted from the infantry in 1998 to join the Zetas, then led by former paratrooper Arturo Guzman Decena. At the time the Zetas were still devoted to their original mission: acting as debt collectors and killers for the Gulf Cartel, a dominant gang, moving hundreds of tons of cocaine, marijuana and heroin into Texas.
The enforcers adopted the name Zeta -- the letter Z in Spanish -- from a radio signal Guzman had used as a paratrooper. Guzman baptized himself Z-1, and Lazcano became Z-3.
A few months later, after Mexican soldiers shot dead both Z-1 and his second in command, Lazcano took control of the Zetas at age 28 and began the group's rapid expansion. They spread the word on the streets, and even advertised on blankets hung from bridges: "The Zeta operations group wants you, soldier or ex-soldier," one said. "We offer a good salary, food and attention for your family. Don't suffer hunger and abuse anymore."
They recruited poor youths, former soldiers, members of other gangs and even foreign mercenaries, including former members of the Kaibil special forces in Guatemala's army, according to the Guatemalan security ministry. The Kaibiles were widely accused of atrocities in that nation's civil war.
As the Zetas grew, so did their ambitions, causing tension with the Gulf Cartel bosses. The first cracks in the alliance appeared in 2007, when Gulf Cartel leaders made a peace deal with the Sinaloa Cartel, a move the Zetas saw as a sellout, according to testimony from Zeta founding member Jesus Rejon, or Z-7, after he was arrested in 2011.
In 2010, tensions boiled over into open warfare as Zetas began attacking Gulf operatives wherever they found them and claiming the turf for themselves. The Gulf Cartel allied with their old Sinaloan rivals to fight back, engulfing the region in violence.
It is impossible to know the Zetas' share of the U.S. narcotics market, which is estimated by the United Nations to be worth a total of about $60 billion annually.
But it's clear that the Zetas' stronghold in northeastern Mexico includes some of the most sought-after trafficking routes into the United States. More than 8,500 trucks cross daily into Texas from the border city of Nuevo Laredo, twice the number crossing from either Tijuana or Ciudad Juarez.
To warehouse and move these drugs, the Zetas have set up cells in Laredo, Dallas and Houston, a U.S. federal court heard this January when it convicted two members of such a cell on homicide, racketeering and weapons charges. Evidence from wiretaps and witnesses show that the cells also move guns bought in U.S. stores and cash into Mexico. U.S. federal prosecutors in Texas say Zetas gunmen have carried out at least eight murders on U.S. soil to date.
The Zetas have also made billions of dollars by diversifying into extortion, kidnapping, product piracy and even theft of crude oil from the pipelines of Mexico's state-owned oil monopoly, Pemex, U.S. agents say. In a recent report, Pemex said it had lost 11.7 million barrels of oil to theft in 2010 and 2011, citing the Zetas as the main culprit.
This diversification breaks with the habits of older cartels, which have focused on drugs. And as the Zetas have made money with their portfolio of crimes, copycat gangs have sprung up with names such as "The Hands With Eyes."
In Guadalupe, police chief Santos said the Zetas receive protection payments, known as "quotas," from taxi operators, restaurants and other local businesses. "Most people pay up because they are so scared of what the Zetas will do," Santos said.
During the recent patrol, police were called to the scene of a shooting, finding a car dealership riddled with bullet holes, in what Santos said was a reminder over these payments.
When the Zetas burned down a Monterrey casino in broad daylight in August, the alleged reason was an extortion payment, according to federal prosecutors who have filed charges against alleged Zetas arrested for the crime.
The desire for shakedown money has fueled the spread of the Zetas across Mexico, investigators say. "What they want to do is control territory and physical space, where they can simply co-opt other businesses and collect tax," said Steven Dudley of the Washington-based research group Insight Crime. "That model is easily replicated."
Agents say that as the Zetas have expanded, they have filled their ranks with unruly thugs who can be hard to control. "These new players ... are doing things that might not be sanctioned by the leadership. ... The outrageous behavior has made them the big target of the government," said a senior U.S. law enforcement official working in Mexico, speaking on condition of anonymity.
Such wild elements may have been behind the May 13 atrocity that made headlines around the world. Early that morning, 49 corpses with their heads, hands and feet cut off were left on a highway east of Monterrey. A note signed with the Zetas name was found amidst the carnage. However, messages released in the following days denied the Zetas had ordered the massacre.
Investigators say Elizondo, arrested a week later as the alleged mastermind of the massacre, may have disobeyed top leaders in carrying it out. None of the victims have been identified. Police said they could have been foreign migrants traveling through Mexico to the United States. The Zetas often kidnap migrants for ransom and murder those who don't pay.
Zetas assassins have been effective in fighting rivals. In the last year, the Zetas have pushed the Gulf Cartel out of much of its historic turf along the South Texas border and challenged the Sinaloa Cartel close to their homeland in the Pacific. In a single ambush in the Pacific state of Nayarit in 2011, Zetas slaughtered 29 alleged Sinaloa Cartel operatives when the Zetas attacked with mounted machine guns and grenades.
Even more brutally, Zetas prisoners in February stabbed and bludgeoned to death 44 alleged Gulf Cartel inmates in a jail on the edge of Monterrey. After the attack, which officials say involved the help of corrupt guards, 35 Zetas prisoners escaped.
Several other major cartels have formed an alliance to hit back against the Zetas with their own paramilitary units, U.S. agents said in testimony at a congressional hearing in October evaluating Mexico's drug war. At the forefront of the fight back is a shady group calling itself the "Zetas killers," believed to be funded by rival cartels. Gunmen from this group dropped 35 corpses of suspected Zetas on a highway in Veracruz state in September.
In a video released after the incident, men in ski masks claimed they were going after the Zetas because of the harm their extortion and kidnapping rackets inflicted on communities. "We want the armed forces to trust us that our only goal is to finish off the Zetas," a man in a ski mask says on the video. "We're anonymous warriors, faceless, but proudly Mexican."
Since President Felipe Calderon took power in 2006 and sent 50,000 soldiers after the drug cartels, Mexican and U.S. agents have worked together to root out top drug traffickers.
The most spectacular takedowns include Arturo Beltran Leyva, a breakaway boss of the Sinaloa Cartel, who was shot dead by Mexican marines in 2009, and La Familia boss Nazario Moreno, whom police killed in 2010.
Lazcano and his top deputies have proved to be more elusive, thanks to their military-style organization. "They've got an advance guard, they've got a main body, they've got a rear guard," the U.S. official said. "They do forward reconnaissance almost like you would see if you were moving a dignitary around."
Zetas leaders also escape detection by using encrypted radio and Skype instead of telephones, the U.S. official said. Agents say leaders of the group's small operating cells are moved every few months to avoid detection.
Mexican soldiers say they came close to nabbing Lazcano in a house on the outskirts of Monterrey in 2009, but that after scouts warned him of the raid, he escaped the neighborhood in a bulletproof Jeep Cherokee.
With Lazcano still at large, the Zetas will pose a challenge for the next Mexican president. Calderon is barred by law from seeking re-election in the July polls. The current front-runner, Enrique Pena Nieto of the opposition Institutional Revolutionary Party, has pledged to create and deploy a new police force against the gangs and gradually put army troops back in barracks, a promise popular with many voters who are tired of the relentless drug war.
Zetas hit squads could make that difficult. A message signed by the Zetas and hung from a bridge in Monterrey in February took aim at the Mexican government. "Even with the support of the United States, they cannot stop us, because here the Zetas rule," it said. "The government must make a pact with us because if not we will have to overthrow it and take power by force."
(Additional reporting by Lizbeth Diaz in Mexico City; editing by John Blanton and Prudence Crowther)