By Stephen Kalin and Noah Browning
NEHM, Yemen/DUBAI (Reuters) - Saudi Arabia and the United Arab Emirates have pumped billions of dollars into fighting Houthi rebels in Yemen, but the Gulf states' three-year campaign risks being derailed after their local allies turned on each other this week.
It was a serious setback for the Saudi-led coalition whose thousands of air strikes have so far failed to deliver victory over seasoned Houthi fighters aligned with Iran.
Riyadh and its allies see victory in Yemen, where they are backed by U.S. weapons and intelligence, as vital if they are to counter Iran's growing influence in the Middle East, a priority for Saudi Crown Prince Mohammed bin Salman.
But coalition prospects have been dimmed by an armed uprising this week by fighters in southern Yemen, who have been backed the United Arab Emirates (UAE), against government forces until now on the same side.
This comes at a time when the coalition war effort has already been running into trouble. Late last year, the coalition moved quickly to support former president Ali Abdullah Saleh when he seemed to be about to end his backing for the Houthis, but he was killed by the Houthis.
Since then, there has been no sign of a new strategy to end the war in Yemen and Saudi efforts to confront Iran in other theaters including Syria appear to be losing momentum.
The Houthi-controlled capital Sanaa appears within the grasp of pro-coalition Yemenis, who retook territory from the Houthis after they suffered their own internal struggles late last year.
But the coalition still faces formidable obstacles. From the Nehm front line 40 km (25 miles) east of Sanaa, the lights of the city are visible at night. The mountains in between are however full of snipers and landmines.
"The geography takes time (to overcome). It is hard to get supplies in and evacuations take too long," said Major General Nasr Dhibany of the Yemeni army on a recent tour of the area.
The uprising by UAE-backed southern Yemeni separatists against forces loyal to the Saudi-based and internationally recognized government of President Abd-Rabbu Mansour Hadi could further complicate efforts to dislodge the Houthis from Sanaa.
Experts say Saudi Arabia and the UAE will need to think again if strains persist between their local allies.
"Many key powers had thought it could somehow just shelve the political grievances among its allies, focus on the fight against the Houthis and everything would work itself out," said Adam Baron of the European Council on Foreign Relations.
"This shows the folly of that thinking. Without a large-scale political solution, Yemen's conflict will always develop new tentacles."
With U.N.-mediated peace talks stalled for over a year, both the Houthis and the coalition-backed government are still hoping to win by force, even as their local alliances unravel.
The southern separatists want to restore the independent state of South Yemen, which united with North Yemen in 1990.
They have fought alongside President Hadi's forces, but rose up this week and seized control of the southern port of Aden after Hadi refused to sack his prime minister, whom the separatists accuse of mismanagement and corruption.
While the UAE says it continues to support the government and the mission of defeating the Houthis, some southern leaders are based in Abu Dhabi and their troops have been armed and funded by the UAE.
The UAE and Saudi Arabia have presented their cultivation of different factions on the anti-Houthi side as a division of labor aimed at the same goal, but the contradictions of the policy have now become clear.
Prime Minister Ahmed bin Daghr remains holed up in a fortified palace in Aden. Though Saudi and UAE troops protect him, armed southerners are posted near the gates in a reminder of the new realities on the ground.
A government source in the palace accused the UAE of backing the uprising to assert its supremacy in the South, saying the southern secessionists were "just a foreign tool like the Houthis".
"Our necks are in the hands of the UAE," the source told Reuters by phone, declining to be identified.
UAE officials could not be reached for comment, but Foreign Affairs Minister Anwar Gargash on Twitter described the UAE stance as "clear and principled in its support for the Arab coalition led by Saudi Arabia", adding: "No solace for those seeking sedition."
A coalition statement on Thursday said Saudi Arabia and the UAE remained united in seeking a solution that would "preserve the Yemeni state", and spokesman Colonel Turki al-Maliki told Reuters the coalition was monitoring the situation.
"The Kingdom of Saudi Arabia and its Coalition partners have come together to relieve humanitarian suffering in Yemen," he added in a written statement.
Some pro-government forces withdrew from southern battlefronts, where they had been facing the Houthis, and returned to Aden to help fight the separatists.
"It's obvious that Hadi and Saudi Arabia are trying to reduce the UAE's influence over the South," a senior southern secessionist official told Reuters.
Houthi fighters meanwhile face discord within their own ranks and have lost some territory to government forces. Yemeni officials said the rebels were forcibly conscripting fighters and recruiting child soldiers."From interrogations with (Houthi) captives we see that their morale has collapsed," said General Dhibany.
But it not clear that the coalition can push the Houthis out of Sanaa. The main front line east of the city has moved only 80 km (50 miles) in about two years and the rocky terrain leaves government troops exposed.
In one day last week, at least 10 Yemeni soldiers were killed at the Nehm area, officials said.
(Editing by Sami Aboudi and Giles Elgood)