The so-called self-defense groups made up of farmers and other local people have complained that police are ineffective in fighting the cartel called the Knights Templar, which engages in extortion, kidnappings and other crimes.
The takeover of police duties with support from army troops was announced yesterday by a senior public safety official of the central government, Monte Alejandro Rubido.
Michoacan, where much of the population lives in poverty, has become the most pressing security issue facing Mexico President Enrique Pena Nieto, who inherited a bloody war on drugs from his predecessor in 2012 that has left more than 77,000 people dead since it was launched in 2006.
The government yesterday also announced the arrest of two senior members of the Knights Templar.
Yesterday morning, vigilante militia said they had returned several hundred acres of land seized from villagers by the Knights Templar cartel.
The symbolic handover of some 265 hectares of land, which included many avocado and lemon orchards, took place in the village square of Tancitaro in the Michoacan highlands.
"Citizens, businessmen, farmers, people in the communities are bewildered by these narcos. Let's get them out of our land," militia leader Estanislao Beltran told AFP at the end of the ceremony.
Since then, officials have alleged that at least some civilian militias were backed by rival cartel, with critics noting that they used unlawful assault rifles that gangs usually own.
Mexico's federal police and army troops are currently waging a major operation aimed at wresting back control of Michoacan from the Knights Templar gang.
Federal security forces have also clashed with vigilantes who have refused to give up their weapons.
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