The escalating conflict between self-defence groups from the western Mexican state of Michoacán and the Knights Templar drug cartel triggered a shootout in the centre of a major city and attacks on power stations leaving hundreds of thousands without electricity over the weekend.

The clashes were sparked on Saturday when self-defence groups formed in several outlying towns in the Tierra Caliente, or Hot Lands, region marched on Apatzingán, the biggest city in the area and a key bastion of the cartel.

The groups said they were marching because residents had asked for their support to set up a vigilante organisation to protect them from the extortion rackets, kidnappings and extreme violence meted out by the cartel, which acts as a de facto local government across much of the region. The protesters were stopped by the military at the entrance to Apatzingán, asked to leave their weapons behind and proceed unarmed, but promised protection.

Once in the centre of town, however, the marchers were showered with gunfire, some of which reportedly came from snipers positioned on the roof of the cathedral. A video of the events shows people running for cover while the federal police appear to fire back at the attackers. There were also reports of grenades thrown and at least three vehicles set alight.

The marchers withdrew at the end of the day, reporting three injuries. The movement's main leader, José Mireles, announced they had negotiated an agreement with the army promising more patrols around the city, as well of the inclusion of observers from the self-defence groups.

"We are going to make sure that organised crime is expelled from Apatzingán," he said. "They will try to respond."

The response began quickly with near simultaneous attacks on power plants around the state soon after midnight. At least four petrol stations were also torched, including two in the state capital, Morelia.

According to a report in the national Reforma newspaper, the attacks left more than 420,000 people without power, half of whom had their connection restored by the afternoon.

On Sunday, another group of counter-demonstrators took to the streets of Apatzingán and marched on the local army base demanding the withdrawal of federal support for the vigilante self-defence groups. Some held a large banner that read: "Violence and chaos has arrived in Apatzingán. The army brought it and has accompanied it all the way."

Simultaneously, reports emerged of five young men found shot dead in outlying areas of the city. The national newspaper El Universal cited local authorities saying they were wearing self-defence group T-shirts.

Two more people were shot dead elsewhere in the region, reportedly in a shootout between the army and gunmen in a vehicle.

A statement released by the interior ministry on Sunday night, however, made no mention of the reported shootings. The ministry has been co-ordinating a major deployment of federal forces in the region since May that has so far failed to bring the peace it promised.

The ministry statement instead focused on Saturday's march by the self-defence groups: "The opportune intervention of the army, the federal police and the local authorities was able to re-establish public order.

"The actions of the criminals will not stop the actions of the government to protect the population," it said.