I have read several of the reports and they all seem to have conflicting information. I found a summary of a Portuguese news station's article translated and summarized by a Portuguese speaker/reader. Here is the comment:

"Some of that report was wrong. Anyways, here's a link to an R7 news report about the incident. For those who don't speak Portuguese, I'll try and summarize what the reporters were saying:

The city of Pio XII is a small rural town (about 25k population) over 100km from the state capital of São Luiz (I lived there for over a year). Maranhão is one of the poorest states in all of Brasil, BTW. The state of Maranhão doesn't have a team in either the A or B level leagues...I think the city of São Luiz has one or two teams in the D league, though.

Anways, this was not an official game at any level, it was a local game, by locally created teams from the city, officiated by a regular person, not actually trained or hired as a [referee]. The referee was a 19 year old kid. During the match he called a fault and expelled a player (Josenir dos Santos Abreu, 30 years old) for being violent. When the player went to leave the field, he went to the referee and kicked him.

Now here is where the written report and the video diverge. The written report states that the referee had the knife with him, where the video report states that he left the game (which was put on hold during the time) and went to his house which was close to the field. They say that he then returned with the knife and attacked the player, stabbing him twice. The player died on the way to the hospital.

The people watching the game then attacked the referee, pinning him to the ground, then beating the hell out of him. It was during this time that the two main suspects (who are still on the run) killed the referee and decapitated him. They then put his head on a fence post.

The local cops have stopped the search for the two suspects since they have exhausted the search in the local area. They are now waiting to hear from the police throughout the state.

(Translator's comments)
Please don't think that this is what football is like in Brasil, this is the first time I've ever heard of anything remotely like this. This game was a type of local pick-up match. The players are not professional...hell, not even in the minor-minor-minor sub leagues....these are just people creating teams on the their own and playing matches on a make-shift pitch next to a freeway.

This has nothing to do with, or reflects on, the World Cup. If it does, then by that logic, any violence that comes from a basketball pick-up game in Miami means that the Finals played by the Heat would have people getting shot on the court."