By Cynthia Johnston and Mohammed Ghobari
SANAA (Reuters) - Talks in Yemen to broker a transition from President Ali Abdullah Saleh to his opponents have stalled in a public game of brinkmanship, but sources close to the discussions said on Monday a deal is still within reach.
An explosion at an armaments factory killed over 100 people in a town in the south where al Qaeda militants appear to have driven out government forces -- a reminder of the instability which Saleh's Western allies fear in the poorest Arab state.
Saleh, who has been alternately conciliatory and defiant, has vowed in public to make no more concessions to opponents who are demanding he step down after 32 years of authoritarian rule.
But there were signs the back-and-forth on a transfer of power, which has involved U.S. officials, may not be dead. The ruling party recommended forming a new government to draft a constitution based on a parliamentary system.
Saleh, a perennial survivor of civil wars and militancy, has said Yemen may slide into armed conflict and fragment along regional and tribal lines if he leaves office immediately.
An opposition spokesman said that talks had been halted, raising fears that if the impasse continued violence between rival military units could replace the political process.
But, speaking on condition of anonymity, another opposition figure said a deal was still possible and that Saleh was looking to ease conditions the opposition wanted to set on his family's future activities.
"We are on the path to completing a deal," the opposition figure said.
"The president is trying to improve the negotiating conditions, especially relating to the situation of his sons and relatives."
Political sources in Yemen said a deal would probably involve the resignations of both Saleh and a main rival, General Ali Mohsen, who has sent troops to protect the protesters.
The sons and close relatives of the president would also leave their positions, but the government side wants guarantees they would not be pursued legally. It was not immediately clear if they would stay in Yemen, but that was an option.
An opposition source said Saleh was likely to hand over to a vice-president, in line with the constitution. An opposition official said the current vice-president did not want the job and a new figure would probably be chosen.
A new government would be formed to amend the constitution and draft laws for parliamentary and presidential elections, political sources said.
However, as in Egypt, where the overthrow of Hosni Mubarak last month after 30 years in power was an inspiration to Saleh's opponents, the focus would be on amendments to the current basic law, rather than on drafting a new constitution from scratch.
The transition was likely to proceed faster than Saleh said last week he was ready to offer -- power could be transferred well before the end of the year deadline Saleh proposed. There has been talk of switching to a parliamentary system based on proportional representation, political sources said.
The blasts at the bullet factory in south Yemen came a day after clashes between militants and the army in the town.
After troops appeared to abandon the city of Jaar on Sunday, local people flocked to loot a factory that manufactures bullets. Witnesses said a series of powerful blasts, possibly triggered by a cigarette, caused a massive fire.
"This accident is a true catastrophe, the first of its kind in Abyan," said one doctor at the state-run hospital in Jaar in Abyan province, where al Qaeda militants and mainly leftist southern separatists are active.
"There are so many burned bodies. I can't even describe the situation."
SCORES OF WOUNDED
Doctors put the death toll at 110, but said that even arriving at a figure was difficult because the charred remains were difficult to count. They said some victims, including women and children, would be buried in a mass grave.
Scores were wounded, doctors said, and many bodies remained inside the factory, which also contained stores of gunpowder.
Suspected al Qaeda militants had seized control of several buildings including the bullet factory in Jaar, which is home to several hundred thousand people. The army tried to dislodge them, but later appeared to have pulled back to the provincial capital of Zinjibar. Security there was tightened after militants fired rockets at state buildings, witnesses said.
Washington and neighboring U.S. ally Saudi Arabia have long seen Saleh as a strongman to keep al Qaeda from extending its foothold in a country which many see as close to collapse.
Yemen's al Qaeda wing claimed responsibility for a foiled attempt in late 2009 to blow up an airliner bound for Detroit and for U.S.-bound cargo bombs sent in October 2010.
Jaar is just one of many areas, far from the control of the central government in Sanaa, that have effectively slipped out of state hands as the crisis over Saleh's rule wears on.
Saleh told the ruling party on Sunday that the opposition, while it said it wanted a peaceful transition, was seeking to have areas outside the capital, including where northern rebels and separatists hold sway, slide out from government control.
The governors of Jawf and Saada provinces in the north have left, fearing confrontations with tribes who no longer backed the president. In central Yemen, the governor of Maarib was stabbed after trying to disperse a protest earlier this month.
Residents of these areas, where security forces have largely disappeared from the streets, say they have formed popular committees to run affairs where local government has evaporated. Islamists and tribesmen hold sway in some areas.
In Abyan in the south, parts of the province including Jaar and two other districts were no longer under state control, residents said.
With central powers weak, Saleh's government has relied on tribal allies to maintain order. But in recent years it has faced rebellions by Zaidi Shi'ites in the north and a separatist movement hoping to recreate the state of South Yemen that united with the north under Saleh's rule in 1990.
More than 80 people have been killed since anti-government protests began in January, inspired by popular revolts in Tunisia and Egypt.
(Additional reporting by Mohammed Mukhashaf; Writing by Cynthia Johnston; Editing by Alastair Macdonald)