(Adds analyst quote, local reactions, changes dateline to APATZINGAN)
By Simon Gardner
APATZINGAN, Mexico, Jan 14 (Reuters) - Vigilante groups battling a powerful drug cartel in a troubled region of Mexico on Tuesday rejected a government call to lay down their arms, raising the risk of a serious security challenge to President Enrique Pena Nieto.
On Monday, Mexico's interior ministry ordered the heavily armed vigilantes to stop fighting the Knights Templar drug gang in the western state of Michoacan, where violent confrontations have converged on the city of Apatzingan in the last few days.
Apatzingan is considered a stronghold of the Knights Templar, and over the past week, so-called self-defense groups have pushed to take control of surrounding towns and villages.
Hundreds of federal police massed outside the city on Tuesday as dozens of soldiers and military police in full riot gear moved in to protect the mayor's office.
Some roads around the state were closed, and at least one person was killed in clashes in a nearby town.
The violence in Michoacan has raised serious questions about the government's efforts to restore order in Mexico, where more than 80,000 people have been killed in turf wars between gangs and in their clashes with security forces since 2007.
Jose Mireles, the most visible leader of the vigilantes, said there could be no talk of putting down guns in Michoacan while the leaders of the Knights Templar remain at large.
"I am not in favor of disarmament, quite the contrary," he said on a video posted on the Internet.
Estanislao Beltran, another leader of the vigilantes, told Mexican radio that to disarm would be to put themselves at risk.
"It's not right for the federal government to come and disarm our soldiers ... who are defending the people," he said, claiming that federal troops had strafed a local village with bullets, killing four people, including a girl of 11.
There was no obvious presence of vigilantes in central Apatzingan on Tuesday.
Already battling the Knights Templar, the government risks opening up another front if the vigilantes refuse to disarm, complicating efforts to restore order in Michoacan.
"There's no question that this is the first in-depth test to see if he (Pena Nieto) has a strategy to tackle organized crime," Javier Oliva, a political scientist at the National Autonomous University of Mexico (UNAM).
Pena Nieto has tried to shift attention away from the drug violence after his predecessor Felipe Calderon staked considerable political capital on rooting out the cartels.
Calderon's government killed and captured dozens of senior gang members, but gangland murders intensified and helped condemn his conservatives to defeat in the 2012 presidential elections.
The mounting violence in Michoacan has made it harder for Pena Nieto's government to turn public attention away from security issues.
In Antunez, about 20 km (12 miles) from Apatzingan, locals reported that soldiers opened fire when the inhabitants tried to stop them from disarming vigilantes late on Monday night.
"They threatened to kill us. They pointed guns at our chests," said Francisco Vargas, 23, who said his uncle-in-law Mario Perez, 56, was shot dead by soldiers.
Perez, a local fruit harvester, was not a member of the vigilante groups, his family told Reuters.
Convoys of federal police in pick-up trucks headed along the highway towards Tierra Caliente, or Hot Land - an arid part of Michoacan where the fighting has been most intense.
In the back of each truck, police manned mounted machine guns, their faces obscured with balaclavas and goggles. Some had heavy bandoliers slung around their torsos.
"We're scared," said Teresa, 35, a mother of two who did not give her last name to avoid being targeted. "We welcome the police, the military, but they should not disarm us."
The government had appeared to tolerate the vigilantes, apparently in the hope they could oust the Knights Templar. Militia leader Mireles himself received protection from federal troops after surviving an airplane accident earlier this month.
However, some Michoacan locals say the vigilantes have been infiltrated by drug cartels from neighboring states, so that the government risks replacing one criminal gang with another.
"It's a scattered and erratic policy," said Raul Benitez, a security expert at UNAM. "(The government) was surprised. When they realized what they had, they were up to their neck in it." (Additional reporting by Anahi Rama, Lizbeth Diaz and Alexandra Alper; Writing by Dave Graham; Editing by Kieran Murray and Gunna Dickson)