A traditional patriotic yell to celebrate Mexican independence was cancelled after a crew of gunmen appeared.
Michoacan state police beefed up security in the town of Querendaro because of the threat, said the state police chief, Armando Soto la Marina.
Mayor Filiberto Romero suspended the traditional event in which he was to cry "Viva Mexico!" from the balcony of the town hall, drawing the same shout in unison from hundreds of people gathered below.
But men carrying rifles and grenades arrived and demanded they clear out or be attacked. People fled in panic. Some took refuge inside the government building waiting for the gunmen to leave. There were no reports of injuries.
No information on who the gunmen were was available late Thursday, but the presence of high-caliber weapons indicated the incident might be drug cartel related.
A grenade attack on the same holiday in 2008 killed eight people and wounded dozens in the main square of the Michoacan state capital, Morelia.
Most Independence Day festivities have gone on as usual this year, but local authorities have canceled patriotic events in the past in worry about possible attacks by drug gangs. Last year, the mayor of the border city of Ciudad Juarez, considered the epicenter of Mexico's drug war, canceled the traditional event.
More than 35,000 people have been killed since Mexican President Felipe Calderon launched an armed offensive against drug cartels in December 2006, according to an official tally. Other groups say the death toll is about 40,000.
The Associated Press contributed to this report.