IXCATEOPAN, Mexico (Reuters) - Decked in glittering Aztec costumes with towering feather headdresses, Mexican Indians paid tribute on Monday to what they said were the bones of the last Aztec emperor, buried in a hilltop town nearly 500 years ago.

Nahua Indian men in gold, red and green warrior dress and women in "huipil" tunics danced with bells on their ankles and wafted incense over the disputed tomb of the emperor Cuauhtemoc to mark the anniversary of the day in 1949 when his remains were exhumed in the mountains of central Mexico.

A refusal by Mexican authorities to accept the bones as authentic, and local squabbling over who should guard them, marred the annual festivities around the blackened skeleton many indigenous Mexicans consider a sacred treasure.

"Cuauhtemoc was a martyr. He was tortured and killed defending his homeland from the invaders. For us he's more important than Jesus. He's our hero," said an Indian known as Metztli, as he adjusted his shimmering pheasant-feather headdress.

"For us these remains are very symbolic, but the authorities are crushing our culture and making a dispute out of our traditions," said Juan Ceron, one of a group of Indian activists who walked for eight days from Mexico City to Ixcateopan, to protest a local government move to seize the rights to the bones.

Cuauhtemoc led the desperate resistance to Spanish invaders who conquered the Aztec capital Tenochtitlan, today's Mexico City.

According to local legend, when the Spaniards hung him in 1525, Aztec warriors slipped away with the body and partially cremated it.

They wrapped the charred skeleton in a bundle and carried it to Cuauhtemoc's birthplace, Ixcateopan, in a secret journey that took four years, travelling by night and hiding out for weeks at a time. The remains were buried in 1529 in a ceremony kept secret from the Spanish, locals say.

BODY EXHUMED

The secret was passed down from generation to generation for centuries, until in 1949 it leaked out and the federal government ordered the tomb exhumed.

Indigenous groups have marked the anniversary of the exhumation ever since with a ritual ceremony in the 16th century church that is now a shrine to Cuauhtemoc, the skeleton displayed behind glass at the altar.

After carbon-dating tests, archeologist Eulalia Guzman declared the remains were authentic, but over the years, other experts refuted the claim.

"It's very controversial, but the authorities eventually ruled that they are not Cuauhtemoc's remains," said German anthropologist Mechthild Rutsch at the National Institute of Anthropology and History.

Locals are bitter that the story is disputed. And many are angry that bickering among local politicians recently led to the town mayor stripping 69-year-old Jairo Rodriguez -- the 13th "keeper of the secret" -- of his title as guardian of the tomb.

While few tourists make the two-hour bus ride up a potholed mountain road to Ixcateopan from the bustling town of Taxco, history fans from as far away as Canada and Spain come here in February to celebrate Cuauhtemoc's birth date.

Locals say they are not interested in tourism, they just want to be taken seriously.

"Why do they deny what is in our blood? His remains must be somewhere and why not here? Aztec tradition says a king must be buried where he was born," said Claudia Sotero, who runs the cobblestoned town's telephone service.