Police carrying shields and wearing gas masks took over the colonial city's picturesque main square after hundreds of activists with metal poles and sticks surprisingly abandoned the plaza, their bastion for five months, without a fight.
After a full day of breaking down burning barricades and clashing with protesters, police then quickly dismantled the shabby tent city the activists had set up in the square.
A nurse was killed in another part of the city, and protesters said he was hit by a tear gas canister. A white sheet and a Mexican flag covered his body.
Mexican President Vicente Fox ordered federal forces to seize the city, which striking teachers and activists have occupied since May to demand the state governor's resignation, after gunmen thought to be local police shot dead a US journalist and two other people on Friday.
The invasion began on Sunday morning as armoured trucks flanked by riot police destroyed barricades of burning tyres, rocks and old furniture.
They fired water cannon at anyone in their way into the city centre, protected by SWAT teams with assault rifles.
Demonstrators fled in some areas but stood up for a fight in others. Hundreds surrounded six busloads of unarmed police, forced them to flee and then set fire to the buses.
Several blocks from the city centre, dozens of demonstrators, many using goggles to protect their eyes from tear gas, waited behind a barricade of burning tyres.
Oaxaca is famous for its architecture, cuisine, indigenous crafts and archeological ruins, but many tourists have been scared away in recent months as the protests, which began as a teachers’ strike in May, turned violent.
The protesters accuse state Governor Ulises Ruiz of corruption and repressive tactics, and had vowed not give up their occupation until he is removed.
Although the crisis is over local issues, it has raised fears it could spark unrest elsewhere in the country, which was shaken by weeks of street protests after a fiercely contested presidential election in July.
The protesters have said Mr Ruiz was behind recent shootings and accused him of corruption and repressing dissenters.
As the riot police swarmed into Oaxaca, chanting protesters waved banners in their faces. Some raised their white-painted hands to show they were unarmed.
Other Oaxaca residents, exhausted from months of anarchic protests, welcomed the arrival of the federal police, cheering and waving white flags.
About a dozen people, mostly protesters, have been killed since activists took to the streets in a bid to topple Mr Ruiz, who blames the protesters for the violence.
US cameraman Bradley Will of the Indymedia news organisation was one of the three people killed on Friday, hit by a bullet to the torso.
Indymedia posted Mr Will's last minutes of footage on its website. It appeared to include the moment he was shot.
President Fox has vowed to end the crisis before handing over power to
President-elect Felipe Calderon of the conservative ruling party on
December 1.