ASUNCION (Reuters) - Paraguayan police Fridaykilled a leader of a leftist rebel group blamed for kidnappingsand murders in remote areas, authorities said, a victory forPresident Fernando Lugo whose popularity is waning.

Gabriel Zarate is the second leader of the ParaguayPeople's Army (EPP) to be gunned down in shootouts with policein as many months.

The government is cracking down on the small Marxist groupthat operates in a cattle-raising region near the Brazilianborder. The rebels have terrified ranchers but have had littleimpact on overall investment in the world's No. 4 soyexporter.

Lugo, a left-leaning former Roman Catholic bishop who tookoffice in 2008, is accused of failing to deliver on campaignpledges to redistribute wealth in the politically unstablecountry. He has also been weakened by paternity scandals.

Lugo, who was diagnosed with cancer last month, hasadmitted to fathering a child when he was still a cleric.

The EPP lacks the size and reach of larger South Americaninsurgencies. But the provinces it operates in are home tolarge beef ranches, and their economic importance is growing.

Zarate's death could trigger fresh attacks on securityforces in the region, which also is a marijuana-growing area.

In April gunmen killed two people in an attack on a senatorwho denounced drug smuggling. Paraguay is an important regionalsupplier of marijuana. (Reporting by Daniela Desantis; Writing by Alonso Soto;Editing by Simon Gardner and Xavier Briand)