Casualties from Mexico's war on drugs already have been mounting, and the bloodshed has prompted waves of concern in Washington and elsewhere. "Mexico right now has issues of violence that are a different degree and level than we've ever seen before," Homeland Security Secretary Janet Napolitano told Congress this week, saying it has become one of her top priorities.

Worries about Mexico are starting to affect investors' perception of the country, too. On Friday, the peso hit a record low, breaking through the psychologically important 15 per dollar barrier, closing at 15.23. Though the principal reason is concern over the effect of the U.S. economic downturn, violence "has definitely raised Mexico's profile in a negative fashion with investors," says Gray Newman, chief economist for Latin America with Morgan Stanley.

In unusually bellicose language for a Mexican president, Mr. Calderon is making clear he plans to ramp the fight up further. "It's either the narcos, or the state," he said in an interview published on Friday by Mexican newspaper El Universal.

Since taking power in late 2006, the conservative politician has sent more than 40,000 army troops to several Mexican states to confront increasingly brazen and violent drug-trafficking gangs. So far, turf wars between rival cartels have grown bloodier, claiming an estimated 6,290 lives last year. So far this year, more than 1,000 people have died, officials say.

Mexican officials say that the rising violence is a sign that pressure from the government is forcing the cartels to battle each other for turf. And they stress that Mr. Calderon is the first president to tackle the issue head on after his predecessors let the problem slowly build.

"Taking on the cartels is parenting a child having a tantrum. When you start disciplining the child, the tantrum increases at first. But if you stay firm, it eventually works," Mexican Interior Minister Fernando Gomez Mont said in an interview.

Mr. Gomez Mont said Mexico is taking important steps such as forcing law-enforcement agencies from different levels of government to share information, but needs to sharply raise spending on security-related issues.

The violence could get worse before it gets better. Drug cartels are adopting guerrilla-style tactics, ambushing security forces and assassinating high-level security officials and others. They are also smuggling entire arsenals of weapons from the U.S.

"Eighteen months ago we saw a spike in .50-caliber machine guns heading south," says William D. Newell, special agent in charge of the Justice Department's Bureau of Alcohol, Tobacco, Firearms and Explosives station in Arizona. "Six months ago we started seeing grenades. That's a serious escalation of violence."

Some agents fear more dramatic attacks such as car bombs are next. A memo distributed by the ATF's Bomb Data Center, circulating among U.S. law-enforcement agencies, reports that this month a gang of gunmen, presumably linked to narcotics groups, stormed a mining site in the Mexican state of Durango and made off with over 250 pounds of explosives.

Write to David Luhnow at david.luhnow@wsj.com and Joel Millman at joel.millman@wsj.com