By Lizbeth Diaz
TIJUANA, Mexico (Reuters) - Mexico's famously seedy border city of Tijuana is enjoying a lull in drug murders as the country's most powerful cartel gains the upper hand over its rivals.
While other parts of Mexico are hit by an increase in drugs violence, the beheadings and massacres familiar a few years ago are now rare in Tijuana, a key battleground on one of the most lucrative drug smuggling corridors to the United States.
Nightclubs and restaurants that shut down during a peak in violence in 2008 have cautiously begun to reopen their doors over the last year and officials say investment is picking up.
Long one of Mexico's most vibrant border cities, lying just across from San Diego, Tijuana is home not just to sleazy bars and brothels but also to a cutting edge electronic music scene and internationally renowned contemporary artists.
Much of that changed, however, when battles between rival drug gangs sparked daytime shootouts and many brutal murders.
Residents remember how one day more than a dozen corpses were dumped opposite a school. Another day brought the capture of the "stew maker," who dissolved hundreds of bodies in acid to hide evidence of murders committed by his gang.
"I'm still worried about the violence, but it's nothing like as horrible it was," said the elderly owner of an elegant Japanese cafe on a lively strip of gourmet restaurants.
"Before you had to zigzag around the city to avoid getting kidnapped, which is what happened to several people I know," she said over the din of teenagers enjoying a birthday party in downtown Tijuana. "It's a different Tijuana now."
So far in 2011, there have been 349 homicides in Tijuana, way down from the peaks of 820 in 2010 and 844 in 2008.
Mexico's government claims credit for the improvements after flooding the state of Baja California with police and soldiers in 2009 and helping to dismantle the once-dominant Arellano Felix cartel by capturing several of its leaders.
"Until recently Tijuana suffered extreme violence, but commitment from the local police, the governor, has led to a drastic drop," President Felipe Calderon said last week.
He says Tijuana is an example of the way forward, even as violence has mushroomed in other areas in the country, including the once-safe industrial city of Monterrey, hit by a dramatic surge in killings over the past two years.
Suspected cartel members torched an up-market Monterrey casino in late August, killing 52 people in one of the worst atrocities of the drugs war.
SINALOA CARTEL IN CONTROL
Tijuana's recovery is a rare bright spot for the government but analysts say there is a more subtle reality -- the decline of the Arellano Felix gang has allowed the Sinaloa cartel, Mexico's strongest, to move in and take control.
With a clear winner emerging from a turf war, violence has slowed, but the drugs trade is still flourishing here.
"The drugs continue flowing, without a doubt. What has diminished is violence between criminal groups," said Edgardo Buscaglia, an security expert at Mexico's ITAM university.
"Organized crime continues, not only drug trafficking but extortion, kidnapping, human smuggling and gun running. But it's under a consolidated group (Sinaloa)."
Calderon has staked his reputation on an army-led crackdown against the drug cartels but the conflict has claimed 42,000 lives since he took office in late 2006 and the bloodshed is hitting support for his conservative National Action Party, or PAN, ahead of the next presidential election in July 2012.
His campaign upset the balance of power, triggering a series of turf wars. A troubling truth is that the violence tends to ease when one cartel establishes control in an area.
Calderon insists, though, that all organized crime groups will be hit with the same force and has vowed to continue the squeeze on gangs until he leaves office in late 2012.
Better security in Tijuana has given hope to investors like Juan Pablo Arroyuelo, who is spending $50 million building upscale villas next to wineries in Ensenada south of the city.
"Right now the violence is under control. Baja California is not at all what it used to be like in recent years. That is giving us confidence to invest," said Arroyuelo.
The head of the Sinaloa cartel is Mexico's most wanted man, Joaquin "Shorty" Guzman, and analysts say he has managed to keep the peace in Tijuana by allying with local crime bosses, all the while keeping drugs streaming steadily north.
Several sophisticated tunnels used for moving drugs under the U.S. border were discovered here this year.
Security experts believe the Sinaloa gang was behind them, as well as one of the largest marijuana fields in Mexico's history found farther south in Baja California in July.
For years, the Arellano Felix family ran Tijuana, using gruesome torture and executions to defend its territory.
Now most of the original leaders are dead or in jail, leaving just a nephew, Luis Fernando Sanchez Arellano, known as "The Engineer." He fought off a challenge from the group's top enforcer, Teodoro "El Teo" Garcia Simental, that led to the bloody battle to dominate the city in recent years.
Sanchez Arellano finally engineered a truce with Guzman and his henchmen that gave him an advantage over his rival.
Garcia Simental was then arrested last year and the Sinaloa cartel's illegal drugs now pass through Arellano's territory for a fee, a U.S. official in Mexico said.
"A deal was struck (that) allows both organizations to operate independently and includes a non-aggression pact, securing for the Sinaloa Federation its long-awaited access to the lucrative port of entry into the United States," U.S. intelligence firm Stratfor said in a report earlier this year.
As drugs pass through Tijuana unabated, the number of local addicts is growing. They gather by the dozens in a rancid sewage canal called "El Bordo" near the U.S. port of entry.
"There are a bunch like me," said local dealer Juan while shooting heroin into his neck. "We are all like zombies."
Addicts like Juan, and a series of violent attacks on rehab centers, remind officials the fight for Tijuana is not over.
"We are on the right path," Baja California state Governor Jose Osuna told business leaders and government officials in August. "(But) it's clear the battle is not won."
(Additional reporting by Rachel Uranga, Anahi Rama and Mica Rosenberg; Writing by Mica Rosenberg; Editing by Kieran Murray)