Gunmen exchanged fire with leftist protesters outside Oaxaca's Camino Real hotel, injuring two men and forcing dozens of tourists, residents and journalists to run for cover.
On Monday, a day after the gunfire, President Vicente Fox's spokesman Ruben Aguilar said officials "absolutely promise that the problem in Oaxaca will be resolved before this administration ends" on Dec. 1.
The clash at the hotel came hours after the U.S. Embassy in Mexico renewed a warning to U.S. citizens traveling to Oaxaca, where protesters have camped out for months, burned buses and fought pitched battles with police.
About 300 demonstrators armed with machetes, knives and pipes descended on the Camino Real searching for Oaxaca state Gov. Ulises Ruiz, whose resignation they demand. They accuse him of rigging the 2004 election to win office and violently repressing dissent.
Thirty protesters searched room by room for the governor, who later said he had been at a nearby restaurant but never went inside the hotel.
A group of about 40 men armed with sticks and guns then attacked and fired at the protesters outside the hotel's front door. Some protesters drew guns and returned fire, creating panic among dozens of people in the street.
Zenen Bravo, a spokesman for the Oaxaca People's Assembly, which is coordinating the protests, said one demonstrator was shot in the elbow and another had been beaten with sticks. Bravo accused the governor of being behind the armed group.
Ruiz denied that and condemned the violence.
"We cannot tolerate these acts of vandalism and aggression against Oaxacan citizens," he said.
Hours before the confrontation Sunday, the U.S. Embassy in Mexico extended an existing advisory for U.S. citizens heading to Oaxaca city, saying they should "consider carefully the risk of travel at this time due to the recent increase in violence there."
The embassy also said it had received reports of robberies and assaults in the city, which normally has a low crime rate and is popular with tourists for its cobblestoned streets, craft markets and cuisine. The advisory warned that protesters might try to close the local airport and that travelers should monitor developments.
Aguilar said at his daily briefing on Monday said the government still encourages tourists "from all over the world to visit Mexico" and added, "There have been no problems with tourists in Oaxaca City or in other parts of the country, despite violence committed by organized crime."
Aguilar said negotiations led by Fox's top Cabinet member, Interior Secretary Carlos Abascal, were ongoing and that federal authorities will not forcibly intervene to restore order.
Asked if Fox would defend Ruiz, Aguilar replied, "He who has been elected by voters cannot be fired by street protests."
Oaxaca teachers went on strike in May to seek higher wages. Protests exploded a month later when police tried to evict teachers from the city's main plaza. Joined by leftists, anarchists and students, the teachers have since taken over government buildings, as well as radio stations to broadcast calls for revolt.
Police and armed gangs have shot at demonstrators on several occasions, leaving at least two dead.
On Saturday, Ruiz warned the teachers that they would be replaced by substitutes and lose their pay unless they immediately returned to work.
Associated Press writers Will Weissert and Ioan Grillo in Mexico City contributed to this report.