One witness and protesters said troops loyal to Saleh, including the elite Republican Guard and Central Security forces assaulted the southern end of "Change Square," the heart of an uprising where thousands have camped out for eight months calling for Saleh's overthrow.
Hundreds fled from the southern end of the camp, they said, as the attack continued from midnight on Friday into Saturday.
"They (the government forces) used armoured vehicles and weapons, rifles. It was an intense fight ... My house was shaking like crazy ... There are no protesters there now -- it's just armed people," said the witness, who lives near the camp.
The reports could not be verified.
Protesters said at least three people had been killed and 25 hit by sniper fire and shelling. A shaken medic said some of the bodies were severely mangled.
"We have ... one killed in a terrible way by the mortar fire -- we only have half a body," doctor Mohammed al-Qubati said at a mosque converted into a field hospital.
Protesters in the opposition encampment on the 4-km stretch of avenue they have dubbed "Change Square" said some buildings and tents were on fire and that protesters had retreated by about half a kilometre.
Saleh said on his return to Yemen on Friday that he wanted to see a truce to end days of heavy fighting in the capital, but opponents said they feared more bloodshed and the United States demanded he relinquish power.
"I return to the nation carrying the dove of peace and the olive branch," Saleh was quoted as saying by state television.
Saleh, who went to neighbouring Saudi Arabia for medical treatment in June when he suffered severe burns in an assassination attempt, said a ceasefire would enable peace talks to take place.
Questions over future
His reappearance raised big questions over the future of the fractious Arabian Peninsula state, which has been paralysed since January by protests against his 33-year rule.
In Washington, White House spokesman Jay Carney said: "We urge President Saleh to initiate a full transfer of power and arrange for presidential elections to be held before the end of the year ... The Yemeni people have suffered enough and deserve a path towards a better future."
In Sanaa this week, protesters escalated their marches by entering territory controlled by state forces, sparking a full-blown battle between loyalist and pro-opposition troops. Some 100 protesters were killed in five days of bloodshed.
Yemen, one of the region's poorest countries, also faces a worsening insurgency by al Qaeda militants, an uneasy truce with Shi'ite fighters in the north and separatism in the south.
Moments after state television's announcement of Saleh's return, Sanaa's streets erupted with bursts of gunfire and fireworks. Shelling rocked the capital's Hasaba district through the night in battles between heavily armed pro-opposition and government forces who nearly sparked civil war in the capital last May.
About 11 fighters were killed in those clashes, medics said.
Opponents saw Saleh's return as an attempt to rally for war and said they expected more bloodshed, while his supporters reacted with joy and said he could restore order.
"I'm so excited," said Akram al-Aghbari, a doorman. "He is an honourable and great man. I know he's coming to stop this terrible violence. People here without him only know how to rule with weapons, but with him back, just you watch."
Abdulghani al-Iryani, a political analyst and co-founder of the Democratic Awakening Movement, said violence lay ahead.
"This is an ominous sign. Returning at a time like this probably signals he intends to use violence to resolve this. This is dangerous," said Iryani.
"His people will feel that they are in a stronger position and they will refuse to compromise. Basically this means the political process is dead in the water."
Many Yemenis thought they had seen the last of Saleh when he flew to Saudi Arabia in June for medical treatment after a bomb explosion at his palace left him with severe burns.
Saleh had been involved in negotiations mediated by Gulf states to leave office, repeatedly promising to step down only to change his position at the last minute.
Two members of Saleh's General People's Congress party denied opposition statements that his return spelled the end for a Gulf-brokered power transfer plan, which could see him hand interim power to Vice President Abd-Rabbu Mansour Hadi.
"This initiative remains effective and Hadi will continue the dialogue to create a binding mechanism to implement the Gulf initiative," Yasser al-Yamani told al Jazeera television.
The Gulf initiative would likely be implemented so that Saleh steps down at a new presidential election. He agreed three times to earlier drafts of the deal only to back out at the very last minute.
Regional power Saudi Arabia, which shares a porous 1,460 km border with Yemen, has been a key player in Yemen for decades, bank rolling Saleh's government to keep al Qaeda at bay and spear heading regional talks on a power transfer.
Some analysts say Saudi Arabia might not have let Saleh return unless a transfer deal favourable to Riyadh was likely.
But Gulf Cooperation Council Secretary General Abdbullatif al-Zayani flew to Sanaa this week to try and resurrect the deal and left after two days with nothing to show for his efforts.
The United States, Saudi Arabia and other powers fear al-Qaeda's Yemen wing could exploit the growing lawlessness in the country. Al Qaeda militants have already seized cities in a Yemeni province just east of a key oil shipping channel in recent months.