Forces loyal to outgoing President Ali Abdullah Saleh and his opponents withdrew from their positions in the capital Sanaa on Saturday, witnesses and officials said, in a further sign a peace deal signed last month was being implemented.

In southern Yemen, two government soldiers were killed in a clash with Islamist militants, medical sources said, as insurgents linked to al Qaeda challenged the peace accord aimed at pulling the country away from civil war.

Witnesses said a military committee set up under the Gulf peace deal signed in Saudi Arabia last month oversaw the dismantling of military positions that have divided the capital since protests against Saleh's 33-year rule began in January.

They said armoured bulldozers removed barricades from Sixty Street which split the capital into a dissident-controlled north and Saleh-ruled south under the military's supervision.

Military trucks were seen carrying armoured vehicles from the base of a brigade led by dissident General Ali Mohsen outside Sanaa.

A spokesman for the committee told the state news agency Saba that the first day of dismantling military positions had gone smoothly.

On the eastern side of the city, Republican Guard troops led by Saleh's son Ahmed also abandoned their positions.

But tribal fighters from the al-Ahmar tribe, are still there, surrounded by paramilitary Central Security Forces, one resident said.

Saleh's forces had fought pitched battles with fighters loyal to tribal leader Sadeq al-Ahmar in the al-Hasaba and Soufan districts of Sanaa, where fresh explosions were heard early on Saturday. There were no reports of casualties.

Since Saleh handed over his powers to his deputy, Abd-Rabbu Mansour Hadi, under the Gulf peace accord, a new Yemeni government headed by an opposition leader has been formed and a early presidential election is set to be held in February.

Hadi has also formed a military committee which oversaw a ceasefire in the flashpoint city of Taiz and supervised the withdrawl of rebel fighters and government forces.

CONTINUED FIGHTING IN SOUTH

In the southern city of Aden, sources at a military hospital said two soldiers were killed and six wounded near Zinjibar, the capital of Abyan province, where Islamist militants have exploited the chaos caused by nearly 11 months of protests to seize swathes of territory.

Apart from Islamist militants, the new government is facing challenges from a southern separatist movement and a Shi'ite Muslim rebellion in the north.

Top oil exporter Saudi Arabia shares U.S. fears that more instability in Yemen could embolden the country's al Qaeda wing - seen by Washington as the group's most dangerous branch - in a country sitting next to oil shipping routes.

European Union diplomats urged separatist leaders in Aden on Saturday to try to resolve their grievances in a national dialogue with the unity government in Sanaa.

The EU ambassador in Sanaa said after talks with southern Yemeni separatist leaders in Aden that the bloc encourages all Yemenis to join a national dialogue to determine the future of the country.

Separately, Abyan's governor said in a statement the fighting had made it impossible to open the main road to Aden, which has been closed for five months.

(Reporting by Khaled Abdullah in Sanaa and Mohammed Mukhashaf in Aden; Writing by Sami Aboudi and Firouz Sedarat; Editing by Sophie Hares)