By John Whitesides

WASHINGTON, Feb 27 (Reuters) - Mexico has made headway in its struggle against the country's powerful drug cartels, but the crackdown has led to more violence as criminal gangs battle for diminishing profits, the United States said on Friday.

The State Department's annual International Narcotics Control Strategy Report also said Afghanistan slashed opium poppy cultivation by 19 percent in 2008 after two years of record highs.

But drug trafficking and poppy cultivation continued to fuel insurgencies in Afghanistan's less secure southern areas, it said.

The report identified 20 countries, including Afghanistan, Mexico, Nigeria and Pakistan, as "major" producers and transit points for illegal drugs. Of those, Myanmar, Bolivia and Venezuela had "failed demonstrably" to adhere to international counternarcotics agreements.

About 60 countries, including the United States, are home to financial institutions that engage in transactions identified as money laundering for drug traffickers, the report said.

The annual report on global anti-drug efforts raised concerns about a growing presence of drug trafficking groups in Central America that have been driven out in Mexico and Colombia by government crackdowns.

More than 6,000 people were killed in the battle for control of Mexico's drug trafficking operations last year, and Mexican President Felipe Calderon has sent thousands of troops to fight the country's violent drug cartels.

The report said because of Calderon's successful efforts, "criminal gangs are now fighting among themselves for now diminishing profits."

"The restructuring of security forces, coupled with the military's strong engagement in the fight to dismantle major drug trafficking organizations, has proven to be effective," it said.

"These efforts led to numerous arrests of key narcotraffickers, the discovery of clandestine drug laboratories, and a dramatic decline in the importation of methamphetamine ... into the United States."

The fight in Mexico has sparked concerns about spillover violence in the United States, and U.S. authorities capped a nearly two-year campaign against one of Mexico's most violent cartels this week with 52 arrests.

Ciudad Juarez, across from El Paso, Texas, has become Mexico's most violent city as security forces take on drug cartels warring for control of smuggling routes into the United States.

(Editing by Stacey Joyce)

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