By Andrew Hammond

SANAA (Reuters) - Seven months after he reluctantly handed over the presidency, Ali Abdullah Saleh's continuing sway over Yemen is worrying Gulf neighbors and Western nations who fear that the political transition could descend into chaos.

While Saleh is held responsible by many Yemenis for the more than 2,000 deaths during last year's uprising, it was the storming of the U.S. embassy on September 13 that appears to have jolted Western countries into changing their view of a man long seen by Washington as its best bet for containing militants.

Soldiers of two units under the control of Saleh's relatives allowed hundreds of protesters through checkpoints around the embassy, a Yemeni security source and Western diplomats said. Breaking through to the inner building, they ripped plaques and lettering from outer walls and tried to smash secure glass doors.

President Abd-Rabbu Mansour Hadi has promised an investigation into the incident, which followed protest calls by Sunni cleric Abdul-Majeed al-Zindani - designated a global terrorist by the United States since 2004 - and the Zaydi Islamist group Ansarallah, also known as the Houthis.

One of Saleh's sons used Facebook to deny accusations that embassy guards had acted suspiciously. He said the Interior Ministry should have sent in riot police.

"We share the concern over the role that the former president and those hardcore elements around him are playing right now," a senior Western diplomat in Sanaa said, adding they were undermining the government and hindering the transition.

"We do have concerns about their resistance to following the legitimate orders of President Hadi."

STABILITY IS A PRIORITY

Restoring stability in Yemen has become an international priority for fear that Islamist militants will further entrench themselves in a country neighboring top oil exporter Saudi Arabia and lying on major world shipping lanes.

The writ of central government authority has further weakened in the chaotic unraveling of Saleh's system of rule. The uprising lifted the lid on myriad social and economic problems facing an impoverished country of 24 million people.

Of all the complications to reestablishing state control, including southern secessionists, a Zaydi Shi'ite revival movement tussling with Sunni Islamists and a covert U.S. missile war on militants, the role of Washington's former strongman in Sanaa has emerged as perhaps the most pressing.

Despite the immunity granted to him under the power transfer deal, Saleh could still face the fate of Egypt's Hosni Mubarak as activists push for ways to have him prosecuted. Mubarak was sentenced to life imprisonment in June for complicity in the deaths of protesters during Egypt's uprising.

Sidelined since Hadi's election in February, Saleh still wields influence through his control of the General People's Congress (GPC) party, a ruling coalition partner, and through powerful relatives who run elite military and security units.

Saleh has warned in recent comments that the Arabian Peninsula state's transition process could descend into chaos, depicting himself as being central to Yemen's territorial unity.

Further, forces loyal to Saleh's relatives have repeatedly mutinied against Hadi's efforts to reorganize the armed forces, staging attacks on the Interior and Defence Ministry buildings.

But pressure on Saleh has grown in recent months.

Thousands of Yemenis have protested against the U.S.- and Saudi-backed power transfer deal which offered Saleh his immunity from prosecution in exchange for stepping down.

The government agreed last month to set up a commission of inquiry into violations committed during last year's uprising, and a transitional justice law could also be passed soon.

"People have an obligation to fulfill the terms (of the transition) and not change them," the diplomat said. "But that doesn't mean we have to sit by if there is evidence that Saleh is violating the laws of Yemen now and it doesn't mean he shouldn't be held to account for that."

EMBASSY ATTACK A WATERSHED

The embassy incident has spurred Western states shepherding the transition into action.

Senior diplomats of ten countries, including Gulf Arab states, European Union members, the United States and Russia, agreed in Sanaa two weeks ago to recommend their governments start preparing possible measures against transition "spoilers".

"They agreed there should be some effort to gather evidence that might point the finger at those who might be considered in violation of U.N. Security Council resolution 2051," said one who was involved in the meeting.

The June resolution calls for a smooth transition, accountability for "all those responsible for human rights violations and abuses", and "security sector reform and changes in senior appointments in the security and armed forces".

The diplomat said names were being collected among supporters of Saleh, "extremist elements" of the Sunni Islamist Islah party - an apparent reference to Zindani and other clerics - and figures from the southern secessionist movement.

"I don't think there's anything imminent regarding sanctions," a U.N. diplomatic source said in New York, but he added: "Sooner or later it will come to that." He said Russia and China were on board with the U.N. moves.

Analysts say Saleh, his party and others may be able to avoid that fate if they contribute to a national dialogue intended to map out a new political system this year.

"Can we force the GPC to accept the idea of a democratic, civilian state in the dialogue and that rivalry should be regulated through the ballot box? We need the GPC to accept this," said political scientist Mohammed al-Mutawakkel.

STILL IN YEMEN

The fourth Arab leader to be unseated in "Arab Spring" protests, Saleh spent several weeks in the United States for medical treatment just before he left office. The U.S. ambassador in Sanaa said two weeks ago it would not be possible to grant him a visa for now, but gave no more details.

Once abroad, Saleh would be open to petitions under international law or domestic laws of any country he stayed in. He recently said he had no intention of leaving Yemen.

"Revenge dominates in Yemeni society. If people feel wronged and no one gives them justice they will try to get it themselves in any way," said Human Rights Minister Hooria Mashhour.

At least 129 activists disappeared during the uprising and hundreds of "enforced disappearances" throughout Saleh's rule still remain unaccounted for, provoking a campaign of portraits on public walls by activists seeking redress.

The capital still bears signs of last year's confrontation, with pock-marked and destroyed buildings such as Yemenia Airways offices in Hasaba. The fear remains that street fighting between former allies under Saleh's rule will return, or that Houthi-Islah confrontations could spread.

Political analyst Abdulghani al-Iryani said there was little chance of the old order reestablishing itself, though Saleh and the north Yemeni tribal and religious elites would try to resist the shift to decentralization.

"It's impossible. If you look at the historical patterns, his regime survived for so long against the law of gravity," Iryani said.

(Additional reporting by Louis Charbonneau in New York, Editing by Sami Aboudi and Samia Nakhoul/Janet McBride)