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LIMA (Reuters) - President Alejandro Toledo on Thursday declared a state of emergency in Peru's central jungle after Shining Path guerrillas killed eight policemen amid an upsurge in violence from the Maoist group.

The emergency decree bans public gatherings and gives police and military the right to search houses and make arrests without warrants.

The rebels killed eight policemen in an ambush on a police vehicle out on routine patrol in the remote Huanuco region on Tuesday, some 220 miles northeast of Lima.

The group that led one of Latin America's bloodiest insurgencies in the 1980s and early 1990s has killed at least 19 police and military officers this year as it links up with what officials and drug experts say an increasingly lucrative drugs trade.

Peru is the world's No. 2 cocaine producer after Colombia and production has risen sharply since 2003 as poor farmers increase production of coca, the drug's raw material.

"This is Peru's new armed conflict and it revolves around coca, in defense of coca and an alliance between drug traffickers and remnants of the Shining Path," said independent drugs analyst Jaime Antezana.

New areas of coca were springing up in Peru's central jungle, despite the destruction of 29,600 acres (12,000 hectares) of the crop this year, as Mexican and Colombian cartels expand in Peru, according to the government.

"Drug traffickers are becoming increasingly sophisticated ... and there are these rebel groups in league with Mexican and Colombian traffickers," Fernando Hurtado, deputy head of state anti-drugs agency DEVIDA, told Reuters.

Hurtado estimated Peru now had the capacity to produce 170 tonnes of tonnes of cocaine this year, up 6 percent from 2004 and up by more than a quarter compared to 2003.

NO LONGER MARXISTS

The rebels at large are no longer Maoists, "but bandits making a living out of crime," according to Benedicto Jimenez, former head of Peru's antiterrorist police and who captured Shining Path leader Abimael Guzman in 1992.

"They've sold out their ideology to make money," said Peru's Prime Minister Pedro Pablo Kuczynski.

Shining Path began its "popular war" in Peru by burning ballot boxes in the Andes in 1980 on the eve of the first democratic elections in 12 years.

A government truth commission in 2003 blamed Shining Path for more than half the 69,280 deaths in the 1980s and 1990s rebel wars with the government.

The group was defeated after Guzman was captured but several hundred rebels remain holed-up in the jungle and were blamed for a bomb outside the U.S. embassy in Lima in 2002.

Today they offer protection for drug traffickers, who supply them weapons, and say they defend poor coca farmers who say coca is a sacred crop with medicinal qualities that is central to their ancient traditions.

In an August interview with Peru's Republica newspaper, "Comrade Artemio" -- the man who says he is the top leader of Peru's Shining Path rebels outside of prison -- said he would continue with a campaign of "selective annihilation" against police and military officers.

"We don't defend drugs trafficking, only the coca producer," he added.

Peru has put a $50,000 price on Artemio's head and Toledo said he was determined to beat the rebels. "We're not going to leave our police and military forces exposed," he said.

(Additional reporting by Marco Aquino)