More than a week ago around 1,000 members of the Guarani-Kaiowa community occupied ranches in the area.
The leader was shot when farmers tried to retake an occupied farm on Saturday.
In 2005 the Supreme Court declared that the area where the violence is taking place belonged to the Guarani.
Justice Minister Jose Eduardo Cardozo travelled to the region with a high-level delegation, including the director-general of the Federal Police and the president of the government's Indian agency, to try to defuse the growing tension.
Federal troops have also been sent there to restore order and police the area. They will remain for a month.
The violence started when the Guarani-Kaiowa occupied five ranches on 22 August, taking hostages who were later released.
The Guarani-Kaiowa been demanding the return of their ancestral lands which, they say, were stolen by ranchers.
Brazil's constitution required the government to map out all indigenous territory and return it for their exclusive use by 1993, but the majority of Guarani lands remains in the hands of the ranchers.
Many Guarani are forced to live in overcrowded reserves or in makeshift camps on the roadside where malnutrition, disease and suicide are high.

The rainbow flags with the Jewish symbol "made people feel unsafe", an organiser told the Windy City Times.
Laurel Grauer said she was told to leave the so-called Dyke March "because my flag was a trigger to people that they found offensive".
The organisers later hit back, saying Israel hides behind LGBT-rights.
"It was a flag from my congregation which celebrates my queer, Jewish identity which I have done for over a decade marching in the Dyke March with the same flag," Ms Grauer told Windy City Times.
Ms Grauer, who works for A Wider Bridge, which supports LGBT people in Israel, said she lost count of how many times she was verbally harassed by other marchers on Saturday.
The Dyke March takes place one day ahead of the city's official Pride March.
It is described by organisers as being a "more inclusive, more social justice-oriented" march than the city's main Pride parade.
In a social media post, the Dyke March said: "This decision was made after [the expelled marchers] repeatedly expressed support for Zionism during conversations with Dyke March Collective members."
Ms Grauer told the Times: "People asked me if I was a Zionist and I said, 'yes, I do care about the state of Israel, but I also believe in a two-state solution and an independent Palestine.'
"It's hard to swallow the idea of inclusion when you are excluding people from that," she continued.
"People are saying, 'You can be gay but not in this way.' We do not feel welcomed. We do not feel included."
In a statement, the Dyke March Collective later accused Ms Grauer's organistion of "using Israel's supposed 'LGBTQ tolerance' to pinkwash the violent occupation of Palestine".
A Wider Bridge hit back in a statement, saying: "That the organisers would choose to dismiss long-time community members for choosing to express their Jewish identity or spirituality runs counter to the very values the Dyke March claims to uphold, and veers down a dangerous path toward anti-Semitism."
They called upon the Dyke March Collective to issue a full apology.
Red State, a conservative blog, wrote: "When you're the organizer of a gay pride parade meant to celebrate 'inclusiveness,' then you're not just engaging in bigotry and anti-Semitism, but you're saying to the world you're also a giant hypocrite."
The Brazilian justice minister has condemned the killing of an indigenous leader who was shot during a land protest in the state of Mato Grosso do Sul.
[NEXT_CONCEPT]
Organisers of an LGBT-rights festival in Chicago are being accused of anti-Semitism after they expelled marchers carrying the Star of David.