By Tim Gaynor

PHOENIX, July 13 (Reuters) - When machinegun-toting hit men fought a bloody battle with police and troops around the Mexico town of Cananea that left 23 dead in May, it at first seemed to be the latest chapter in a very Mexican drug war.

But as U.S. and Mexican detectives subsequently traced powerful assault weapons recovered from the battlefield to Texas and Arizona, it raised the curtain on a deadly and controversial flow of arms from the United States.

A war without quarter for control of cocaine, marijuana, methamphetamine and heroin trafficking routes has killed 1,300 people this year in Mexico, and has created a huge demand among rival drug gangs for weapons of all kinds, authorities say.

Gun sales are illegal in Mexico, and many of the firearms used in Mexican crime are simply bought over-the-counter in the United States, where everything from pistols to high-powered assault rifles can be obtained legally, detectives say.

The U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) estimates that gunrunners haul thousands of weapons a week over the border to Mexico, and they say demand is voracious.

"Just as you see the flow of drugs that comes north, there is an iron river of guns that flows south into Mexico to supply criminal organizations on the border," said Tom Mangan, senior special agent with ATF in Phoenix.

"They are in the market for machine guns, hand grenades, rocket-propelled grenade launchers and Stinger anti-aircraft missiles ... It's like they are outfitting an army," he added.

PISTOLS AND MACHINEGUNS

The ATF says the gangs favor high-powered AR-15 and Kalashnikov assault rifles, semi-automatic versions of which can be bought at gun shops and gun shows. Also in demand are the drug lords' favorite: heavily decorated Colt .38 Super pistols.

The guns were made popular by the late Juarez cartel capo Amado Carrillo Fuentes in the 1990s, whose monogrammed Colt encrusted with emeralds is exhibited in a drug trafficking museum in Mexico.

"It's like a general who has a commemorative sidearm, these guns are status symbols for the drug lords," said Mangan.

Investigators say the illicit trade is border-wide and the cartels are resourceful.

To ensure a steady supply of weapons to drug killers in the badlands of northeast Mexico in the 1990s, notorious Gulf cartel founder Juan Garcia Abrego bought seven gun shops in Brownsville, Texas, and used them to run guns south.

Nowadays police say criminal fixers known as "gatekeepers" who live in Mexican border towns rely on networks of buyers who shop to order in the United States.

Many traffickers buy weapons from private sellers at gun shows where transactions often leave no paper trail. Others pay intermediaries $50 to $100 a time to make multiple "straw purchases" on their behalf at gun shops.

"We have seen them use the little old guy on the park bench, or homeless people ... to buy guns on their behalf," said William Newell, ATF special agent in charge of the Phoenix field division.

CRACKING DOWN ON THE TRADE

Detectives say the traffickers often make several trips a day over the border with a trunk full of weapons, selling them in Mexico for a markup of 300 to 400 percent.

Specialist cartel armorers then set to work retrofitting the semi-automatic rifles to turn them in to machine guns, some using a high degree of workmanship.

"We've seen guns that were milled and converted that looked like they were done in a factory," Newell said.

The vigorous black market trade has stirred up a storm of criticism south of the border, where Mexican Attorney General Eduardo Medina slammed slack U.S. gun laws as "absurd."

Mexico announced in May that it was setting up an intelligence network with U.S. law enforcement agencies to try to stamp out the trade.

As part of that effort the ATF has agents stationed in Mexico -- in the capital and in the industrial powerhouse of Monterrey south of Texas -- working to train, support and share intelligence with Mexican counterparts.

A key part of that drive is to trace crime guns by running their serial numbers through ATF databases to build up a detailed picture of where each weapon was bought and by whom in a bid to nail the gatekeepers and armorers.

But with a drug-fueled war machine to the south and an estimated 200 million guns in private hands in the United States, ATF agents are under no illusion that it will be easy.

"We are at a crossroads where firearms trafficking and the drug trade come together," Mangan said. "It really is the perfect storm."

AlertNet news is provided by