(Repeats to remove Lizbeth Diaz byline) (For more stories on the changing drug war, see http://www.reuters.com/news/globalcoverage/drugTrafficking)

By Frank Jack Daniel

CULIACAN, Mexico, July 17 (Reuters) - From the lush mountain valleys of Peru to America's toughest streets, ruthless Mexican gangs are grabbing control of the multi-billion dollar cocaine and crystal meth smuggling trade.

When Pablo Escobar and other Colombian cartel leaders were the undisputed kings of cocaine in the 1990s, Mexico was just one of several supply routes to the United States and its traffickers were no more than junior partners.

But those days are long gone and Mexican kingpins Joaquin "El Chapo" Guzman and Ismael "El Mayo" Zambada, both from the sweltering Pacific coast state of Sinaloa, are now widely seen as the most powerful and elusive traffickers in the Americas.

U.S. agents say Mexico's cartels are the main traffickers in almost all regions of the United States and increasingly active at every stage of the international business.

It starts at production, buying coca leaf from farmers in Bolivia and Peru and turning it into cocaine, and extends all the way through to the retail market on U.S. streets.

Mexican gangs have for long controlled cocaine sales in the U.S. Southwest but are now taking substantially more of the trade on the east coast, traditionally dominated by groups from Colombia and the Dominican Republic.

"I'd say 90 percent of the cocaine that comes into New York City comes across the Southwest border (and) is tied to a Mexican organization in some way, either through transportation or a Mexican trafficking group owns part of the load," said John Gilbride, a Drug Enforcement Administration special agent in New York.

Mexicans have also replaced outlawed motorcycle gangs as the main dealers in methamphetamine, or crystal meth, the drug of choice in many rural areas and small towns across America.

TURF WARS

Several top Mexican traffickers have been arrested and extradited or killed in recent years and the government has deployed more than 20,000 troops this year to fight them.

The power vacuum in some gangs triggered vicious turf wars as Sinaloa's cartel moved to crush rival groups based along the U.S. border. About 1,400 people have been murdered this year, but none of it has slowed the flow of drugs.

Sinaloa's capital, Culiacan, is now the nerve center of the most powerful drug gangs in the Americas, merciless when dealing with rivals but as astute as top business executives.

The mark of drugs money is clear in the city's many luxury car dealerships and a cemetery outside town where carved aircraft decorate gawdy tombs that local people say were built for drug plane pilots.

"For good or bad, here it is drug trafficking that moves people and business," said Jaime Camacho, a 24-year-old trained doctor who says he makes more money writing and singing "narco corrido" ballads glorifying the escapades of traffickers.

Local business leaders say growth here is largely driven by farming and other legitimate businesses, but one conceded that more than 10 percent of people are tied to trafficking.

Mexico was already an opium, heroin and marijuana producer when its gangs began moving Colombian cocaine in the 1980s.

After Escobar was killed in a 1993 shootout with police and a U.S.-backed war against other Colombian "capos" put them on the defensive, the Mexicans began to take control. About 90 percent of U.S.-bound cocaine now moves through Mexico.

Colombian cartels are still major players, producing 60 percent of the world's cocaine, but are fearful of extradition to the United States and see less risk in the growing European cocaine market. With little or no violence, they have let Mexicans take control of U.S. shipments.

"They set the conditions now, they are practically running the business," Luis Hernando Gomez, a leader of Colombia's powerful Norte del Valle cartel, said of the Mexicans in a newspaper interview in prison earlier this year. He is awaiting extradition to face charges in a U.S. court.

SUPERLABS

Mexico's cartels are increasingly active across South America, sidestepping Colombians to buy directly from impoverished coca leaf farmers in Peru and Bolivia.

They have set up sophisticated labs inside Peru and ship processed cocaine straight to Mexico for the U.S. market.

"Peru is now an exit port for the drugs all along its Pacific coast, whereas before it all went through Colombia," said Ricardo Soberon, a Peruvian expert on the cocaine trade.

Mexicans are the main players in trafficking routes through Central America, running cocaine in speedboats, fishing trawlers and cargo ships up the Caribbean and Pacific coasts.

In March, the U.S. Coast Guard made the largest ever maritime cocaine seizure -- a 20-tonne Sinaloa cartel load -- from a container ship off Panama's Pacific coast.

U.S. hopes that crop eradication in the Andes and more seizures would hit supply and force U.S prices up have proven wrong. Instead, prices dropped as coca crop yields jumped and cheaper drugs like crystal meth became more popular.

Biker gangs used to lead production of meth but prosecutors say a ban on chemicals used in making the synthetic drug has turned the Hells Angels, the Bandidos, the Sons of Silence and others into distributors for Mexican cartels

Major traffickers south of the border have set up superlabs that churn out hundreds of pounds of the drug daily and police say there are up to 3,000 small-scale labs in Tijuana, many in the tin-roofed shanties that ring the tough border city.

The trade is so widespread that Mexican authorities even found one lab set up in a private drug rehabilitation clinic. (additional reporting by Dan Trotta in New York, Tim Gaynor in Phoenix, Pav Jordan in Lima and Hugh Bronstein in Bogota)

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