The United States and Gulf Arab countries, including Yemen's key financial backer Saudi Arabia, now appear ready to push aside their long-time ally against Al-Qaeda's Yemen-based wing to avoid a chaotic collapse of the poorest Arab state.

Saleh's sometimes violent response to two months of protests against his 32-year rule has tried the patience of Washington and Riyadh, both of which have been the target of attempted attacks by Al-Qaeda's Yemeni branch.

The Gulf proposal for talks in Riyadh was presented to Saleh and a coalition of opposition parties this week. Saleh welcomed it, and Gulf sources said it envisaged handing power over to an interim council of tribal and political leaders who would help appoint a national unity government ahead of elections.

But an opposition source said the proposal would give Saleh and his family, whose control over key posts has long angered many Yemenis, immunity from prosecution. Youth activists said in a statement that this was unacceptable.

"We affirm that this is a people's revolution demanding the fall and the trial of a regime ... to build a new civilian state according to the will of the people, not international parties or political parties that do not represent us," read a statement issued in the name of a coalition of protester groups in Sanaa.

Talks in recent weeks, which included the US ambassador in Sanaa, became bogged down over Saleh's demand for assurances that he and members of his family would not face prosecution.

Saleh has been trying for several weeks to involve Saudi Arabia, sending his foreign minister to Riyadh two weeks ago.

The Gulf proposal envisages Saleh handing over power to a vice-president, the opposition source said. Current incumbent Abd-Rabbu Mansour Hadi has said he does not want such a role, which suggests Saleh would appoint a new figure.

"They informed the opposition that their vision is based on Saleh leaving power after handing authority to his deputy and then forming a national unity government that will prepare a new constitution ... and parliament elections," one source said.

"The Gulf vision is also based on Saleh's proposal that both he and General Ali Mohsen ... leave Yemen, and the Gulf countries have committed to guarantees that Saleh and his family will not face prosecution after they leave," the source added.

Mohsen was one of a string of generals, diplomats and tribal leaders who turned against Saleh after snipers killed 52 protesters on 18 March.

Though Mohsen's army wing is protecting protesters camped out in Sanaa, he is widely mistrusted as a kinsman of Saleh who was for years a loyal pillar of his rule.

US-Saudi policy shift

This week, Washington began to shift its policy of public support for Saleh, who has rallied large numbers of supporters and insists he should stay until elections late this year. Saleh told supporters he would defend Yemen with "blood and soul".

Even before the pro-democracy protests inspired by uprisings in Egypt and Tunisia, Saleh was struggling to quell a separatist rebellion in the south and a Shia insurgency in the north.

Frustration with Saleh's intransigence may push Yemenis, many of them heavily armed and with experience of wars and insurgencies, closer to a violent power struggle that could give Al-Qaeda's regional wing more room to operate.

All of these factors spark concern for stability in a country that sits on a shipping lane through which more than three million barrels of oil pass each day.

In the latest unrest, police shot and wounded two people during a demonstration against domestic gas shortages in the capital Sanaa late Wednesday, witnesses said.

Analysts say Saleh's party's ability to stage large rallies emboldens him, even as hundreds of thousands demand he go.

Saleh is a clever operator who has survived many tussles with rivals, and skilfully used bribes and favours to keep tribal and political backers loyal.

But keeping his allies' loyalty has become more difficult as Yemen sinks into an economic crisis. More than 40 per cent of Yemenis live on less than $2 a day while a third face chronic hunger. Dwindling water and oil supplies are also problems.

Saudi Arabia, the world's biggest oil exporter, fears that its neighbour could fragment along tribal or regional lines if a way is not found out of the crisis soon — something Saleh has warned of in recent speeches.