Cannabis-growers fired rocket-propelled grenades, mortars and machine guns at hundreds of police officers who tried to enter the village of Lazarat.
Authorities said gangs in the village produce 900 tons of cannabis a year, worth about €4.5bn (£3.6bn). Police said nobody was hurt in the pre-dawn attack.
Police said no one was hurt in the hostilities in and around Lazarat, a major marijuana-producing centre about 140 miles south of the capital, Tirana.
A police spokeswoman said officers managed to take control of the village of 5,000 people after exchanging fire with a nearly 30 armed men hiding in a four-story building complex. Laura Totraku said the gunmen fled Lazarat and were heading for a nearby mountain, pursued by police.
But more than three hours later, sporadic gunfire was still heard in the village. Authorities advised residents to stay at home, while scores of police in body armour guarded the entrances to Lazarat.
Interior Minister Saimir Tahiri urged the gunmen to disarm and surrender.
Gangs based in Lazarat are believed to produce about 900 metric tons of cannabis a year, worth about 4.5 billion euros (£3.6 billion) — roughly half of the small Balkan country's GDP.
Around 500 lightly armed police, including special forces officers and the country's police chief, surrounded the village overnight after a smaller force was repelled over the weekend by small-arms fire that injured one villager.
Albania's private A1 channel said its TV crew covering the Lazarat operation was robbed at gunpoint by masked men who also burnt their vehicle.
Over the past few weeks, Albanian authorities have launched a nationwide operation to uproot cannabis plantations.
Marijuana-growing gangs in the village have long seen themselves as beyond the reach of the law. In 2004, shots from the village forced an Italian drug-spotting helicopter to make a hasty retreat.