Among those arrested was Jesus Vasquez Macias, 37, who goes by the alias "El Toro," a leading figure in the cartel, Monte Alejandro Rubido Garcia, a top federal security official, announced late last night.
Garcia said federal forces have taken control of 27 municipalities in the western Mexico state and disarmed 1,209 of the local police officers.
The officers will undergo investigations, Garcia said.
They are accused of colluding with gangs by the vigilante militias that have taken up arms in recent months in restive Michoacan state.
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Since February 2013, the self-defense groups have taken control over some 20 towns.
In recent days, federal forces launched a major operation in the state and tried to disarm the vigilantes as well as flush out the Knights Templar gang.
The capture of Vasquez Macias and other Knights Templar leaders was among the conditions the vigilante groups demanded before giving in to government demands they turn over their own weapons.
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.