The vibrant city of Monterrey is the latest victim in Mexico’s drug-related violence that has already claimed more than 28,000 lives since President Felipe Calderon launched his military-led offensive against the various drug cartels in December 2006. It is a development that is causing great alarm among Mexico’s political and economic elite. Americans living in Mexico are now directly feeling the impact as well.

Affluent Americans living in Monterrey became extremely worried in late August that they were in danger after a gun battle erupted in front of the American School Foundation, which many children of American as well as Mexican business executives attend. The firefight took place between bodyguards working for the Mexican beverage company Femsa SAB de CV and cartel attackers, who were apparently attempting to kidnap young relatives of a high-level company employee. In the course of the ensuing battle, two bodyguards were killed and two others captured. Flying bullets caused students in the school to scramble for shelter in the school cafeteria.

U.S. Ambassador to Mexico Charles Pascual then cautioned employees of the Monterrey consulate to keep their children home, “while we assess the risks and what measures can be taken to reduce it (sic.)” Pascual gave that recommendation even though there was no hard evidence that the children of consular personnel had been targeted.Following the incident, the U.S. consulate in Monterrey also posted an advisory on its website, directed to Americans living in the area. “The sharp increase in kidnapping incidents in the Monterrey area, and this event in particular, present a very high risk to the families of U.S. citizens,” the message read.

Three days later, the State Department escalated its warnings and issued a stunning edict. “U.S. government personnel from the consulate general are not permitted to keep their minor dependents in Monterrey,” a U.S. Embassy spokesman stated. “As of September 10, no minor dependents, no children of U.S. government employees will be permitted in Monterrey.” That was the kind of restriction, designating the Monterrey consulate a “partially unaccompanied post” for U.S. diplomats, is normally imposed only in war zones and other extremely high-risk areas. It underscored just how seriously the State Department took the surge in fighting and the extent of the kidnapping danger.

Caterpillar, a major employer in Mexico, instructed its executives with children to leave Monterrey in September, following the move by the State Department regarding diplomatic personnel. Jim Dugan, Caterpillar’s chief spokesman, explained the reasons in an e-mail to the Wall Street Journal. “Based on recent guidance from the State Department,” the e-mail read, “Caterpillar has informed expat employees in some regions of Mexico (including Monterrey) that they and their families should repatriate as soon as possible.” Other U.S. firms have not gone quite that far, but they are urging their American employees to consider leaving the area.

Some Mexican business leaders are following suit. An executive at leading cement producer Cemex SAB, headquartered in Monterrey, stated that at least 20 families from his circle of friends and acquaintances had left. “It’s a rush for the exits,” he said. That development is disturbingly similar to what began to occur in Ciudad Juarez and Tijuana, two front-line cities in Mexico’s bloody drug war, two or three years earlier. But the economic impact of such an exodus from Monterrey would be vastly greater than the meltdown of those two cities. Monterrey is Mexico’s industrial heart, and in many respects, its economic heart. “Mexico can’t afford to lose Monterrey” to the cartels, one expert warned.

What is happening in Monterrey is doubly depressing given how peaceful that city was just a few years ago. An international consulting group in early 2005 even named Monterrey the safest city in all of Latin America.

Those days are long gone. How far Monterrey has descended into the abyss of drug violence became evident in July 2010 when authorities uncovered a dump site east of the city. Excavations soon revealed that there were at least 51 bodies–some intact and others in pieces–buried at the site. That made the Monterrey dumping ground the second biggest mass grave uncovered in Mexico’s drug wars. It appeared that most of the victims had been executed in groups, their bodies dumped into newly dug pits, and in most cases then set on fire.

The awful discovery underscored—as if any further evidence was needed—that Monterrey was now a major battlefield in the armed conflicts involving the drug gangs, with the struggle being especially intense between the powerful Gulf cartel and its former allies, the Zetas.

When the mayor of Santiago, a prosperous suburb, was abducted and murdered in August, the frustration of Monterrey’s commercial community boiled over. Business leaders took out full-page ads in several major local and national newspapers calling on President Calderon to send more troops into Monterrey and the surrounding state of Nuevo Leon, specifically three army divisions and a division of marines. “Enough Already!” the ads proclaimed. The reinforcements requested would create a military presence even larger than that in the state of Chihuahau, which because of Ciudad Juarez is seen by everyone as the main theater in the drug war. Such a request indicates the level of panic emerging in Mexico’s principal economic metropolis.

The turmoil in our southern neighbor grows worse by the month. And yet our leaders remain preoccupied with lesser security problems in far more distant lands. The Obama administration needs to adjust its foreign policy priorities–and fast.