Former army officer Byron Lima was serving a 20 year sentence for killing Bishop Juan Jose Gerardi, who was an outspoken critic of military abuses during the country's 36-year civil war.
A dozen other inmates and a woman visiting Mr Lima were also killed in the violence at the prison.
Lima was thought to be one of the most powerful men in the Guatemala prison system, with experts suggesting that some prisoners had more control than the guards.
Interior minister Francisco Rivas said four of the dead had been decapitated.
He said violence broke out after someone threw a hand grenade at Lima and then attacked a group loyal to him with guns.
The politician said a group headed by rival gang member Marvin Montiel, who was sentenced to 820 years in prison for the murder of 15 Nicaraguans and a Dutch tourist, started the violence.
Lima was an army captain in 2001 when he was sentenced to 30 years for the killing. The term was later reduced to 20 years. Three other men were also convicted in the case, including Lima's father.
The bishop was bludgeoned to death with a concrete block at his seminary on April 26, 1998, two days after he presented a report blaming the military for most of the 200,000 deaths in the 1960-1996 conflict.
