The US is temporarily closing down its consulate in the Mexican border city of Nuevo Laredo following several months of violence there.
A new police chief was shot dead hours after taking office
Bazookas, grenades and machine guns are said to have been used in recent clashes between rival drug cartels.
They seek to control key smuggling routes across the US border.
The US State Department had warned its citizens earlier this year not to travel to the violence-stricken city, known for its crime and kidnappings.
"A violent battle, which included unusual advanced weapons, took place between armed criminal groups late Thursday in Nuevo Laredo," said US Ambassador Tony Garza.
He expressed his hope that Mexican authorities would bring the situation under control, adding that the consulate would only reopen once things had calmed down.
On Thursday night, some 30 masked men attacked a house believed to be sheltering rival drug smugglers.
The house was partly destroyed by a rocket launcher and hit by hundreds of bullets.
More than 100 people have been killed in Nuevo Laredo since January.
Victims include 15 municipal policemen and the local police chief, Alejandro Dominguez, who was shot dead only hours after taking office.