By Annabella PultzNielsen and Nikolaj Skydsgaard

COPENHAGEN (Reuters) - Residents of the 'free town' of Christiania in Copenhagen began tearing down cannabis-selling booths on its main street on Friday, two days after a shooting incident rocked one of Denmark's favorite tourist attractions.

Known to Danes as "the town", Christiania was founded on abandoned military grounds by squatters in 1971 and is known for its rainbow-colored hippie houses and its cannabis trade, which generates approximately 1 billion Danish crowns ($150 million) a year, according to police.

Free town residents decided at a gathering on Thursday night to start demolishing the booths, concerned that Christiania's liberal drugs culture has been taken over by organized crime.

"I'm not a smoker myself, but I am pro-legalizing. There are so many smokers in Denmark, and it cannot be fair that only 600 residents of Christiania should deal with all the trouble of supplying the entire country," said one of them, Tanja Fox.

On Wednesday evening two police officers were shot during a routine operation while attempting to arrest a known drug-dealer, and one is still in critical condition. A civilian was hurt by gunfire.

The suspected shooter was arrested and died on Friday of gunshot wounds sustained during the operation to capture him.

The drug trade is run by bigger gangs according to Danish police, who from time to time remove the cannabis booths only to see them up and running again the next day.

"If they start building up the booths again tonight, then well, we're here tonight as well. The plan is to continue tearing them down until it works," Christiania resident Helene Schou said.

"I'm not saying hash should disappear completely from Christiania, but we needed a kiosk and what we had was a supermarket."

Copenhagen police director Thorkild Fogde told reporters: "This is not just about hash. It's about organized crime and violence. I hope that what we're seeing today is an attempt to actively help the police."

Christiania has become Copenhagen's fourth biggest tourist attraction, with half a million visitors a year.

"This is too bad. We went here to buy actually, and this was one of our highlights of the trip to Copenhagen," said 22-year-old German tourist Mick, who did not want his last name used.

(Additional reporting by Jacob Gronholt-Pedersen; Editing by Mark Trevelyan)