By Erika Solomon and Mohammed Ghobari
SANAA (Reuters) - Raging battles between heavily armed loyalists and foes of Yemen's president killed 10 people in the capital on Tuesday as a crisis over a violent state crackdown on popular unrest drifted toward civil war.
Gunfire appeared to have stopped in the afternoon but both the opposition and the government vowed to defend themselves against any perceived aggression in a city they have divided between themselves into areas of control.
At least 66 people have been killed since Sunday when frustration boiled over at President Ali Abdullah Saleh's refusal to accept a mediated power transfer plan after suffering serious wounds in a June assassination attempt.
That has turned the violence prevalent in an eight-month-old street revolt against Saleh from shooting at protest crowds increasingly into a military showdown between forces loyal to him and troops and tribes who have defected to the opposition.
World powers fear that spreading chaos in Yemen, home to al Qaeda's most powerful regional branch and flanking No. 1 oil exporter Saudi Arabia, could imperil international oil shipping and raise the risk of militant strikes on Western targets.
Opposition and government sources said they were in talks on a political solution to the crisis. A Western diplomat told Reuters mediators were trying to hang on to the positive direction negotiations had been heading only a few days earlier.
"All the evidence is that we are continuing with Yemeni politics and conflict as usual. They will sit down and talk, but without a deal, it will kick off again in the future," the diplomat said.
Heavy shelling and machinegun fire rocked Sanaa before dawn on Tuesday and snipers lurked in the upper stories of buildings near the site now called "Change Square" where protesters have camped out to demand an end to Saleh's 33-year rule.
Four defector soldiers were killed in street fighting with pro-Saleh forces and two civilians died when three rockets crashed into a protest camp just after morning prayers at around 5 a.m. (0200 GMT), witnesses said.
"We were walking back from prayers. All of a sudden a rocket hit close by from out of nowhere, and some people fell down. And then a second one came and that's when we saw the two martyred," Manea al-Matari, a protest organizer, told Reuters by telephone.
Government officials and opposition groups have traded accusations over who was responsible for the violence of the past two days of which activists at Change Square, who number in the thousands, were the main victims.
But a consensus was emerging among sources on all sides that government forces clashed with those of defected General Ali Mohsen, who has pledged to defend the activists, after his men took control of territory previously under government control.
The opposition said Mohsen's troops took the area to fend off security forces they believed would enter the protest camp.
A witness close to the protest camp said Yemen's Republican Guard forces had fired from an army site on a mountain on Tuesday and shelled Mohsen's First Armoured Division compound. The protesters may have been hit by stray projectiles, he said.
A source at Mohsen's office said his forces were holding off at the request of Saleh's Vice President Abd al-Hadi Mansour but warned that protesters would be harder to control. "I don't think the youth protesters can be reined in until this regime leaves power," the source said.
Some 400 protesters have been killed since protests began in January.
Street fighting later spread to the wealthier Sanaa neighborhood of Hadda that is home to both senior government officials and leading members of the powerful al-Ahmar tribe that is aligned with the protesters.
POOLS OF BLOOD
Crowds flocked to the sites of the blasts that killed the two protesters. Stones were laid around a dark pool of blood near a metal storefront that was ripped open. Around the corner, tattered shoes lay scattered next to a patch of blood.
At the field hospital in Change Square, the wounded were carried in on blood-streaked stretchers while doctors sought to make room for more casualties.
"The clinic is starting to calm down and the fighting appeared to have calmed," said a field doctor, adding hospitals were at full capacity.
Protesters thronging the streets initially headed toward the "Kentucky Roundabout," an area where they have been trying to extend their reach, but were forced to turn back by fierce fighting between government and Mohsen forces.
An organizer of the street protesters said the retreat was a tactical one and they would try again soon. "We're not afraid. We're just waiting for the right moment and it will come as a surprise," he told Reuters.
Government forces on Monday responded to escalating street marches with heavy fire, while snipers shot at protesters from rooftops, according to Reuters witnesses.
Mohsen's forces clashed with pro-Saleh troops on Monday, though it was unclear who started the fighting.
Mohsen, a top Yemeni general, dealt a major blow to Saleh when he and his troops defected after a March attack on demonstrators by security forces that killed 52 people.
Government officials denied on Monday that soldiers were targeting protesters and blamed the bloodshed on the opposition.
A high-ranking ruling party official dismissed claims talks were under way with the opposition to broker a ceasefire, saying government forces had acted in self-defense.
"There are spoilers on both sides who are not looking for a compromise or maybe aren't getting what they want from a compromise," said April Longley Alley, senior analyst Arabian Peninsula at the International Crisis Group in Abu Dhabi. "Maybe they feel they could achieve more by escalating right now."
WORST CASE SCENARIO
Diplomats, struggling for months to help the opposition and government reach a political deal, have feared rising tensions in the capital of the impoverished Arabian Peninsula state could deteriorate into open military conflict.
Several countries including the United States condemned the violence but have given little indication of how they planned to put pressure on Saleh to relinquish power.
Diplomats and Yemeni politicians were scrambling to salvage a long-stalled transition plan under which Saleh, recuperating in neighboring Saudi Arabia from the June attempt on his life, would step down, yielding to a reform process.
A source in Yemen's political opposition said members were meeting government officials and diplomats to try to push through a deal. U.N. mediator Jamal bin Omar and Gulf Cooperation Council Secretary General Abdbullatif al-Zayani arrived in Sanaa on Monday and were expected to join the talks.
Zayani was expected to press for the signing of a Gulf-brokered transition plan which Saleh backed out of three times before. "There's a possibility of trying to push through the Gulf plan for signing this week," an opposition source said.
(Editing by Myra MacDonald)