SANAA - Yemeni government forces killed an al Qaeda leader in an overnight shootout in a southeastern province and militants hit back with an ambush that killed two soldiers and wounded four on Wednesday, security officials said.

Yemen has intensified operations against al Qaeda in the Arabian Peninsula (AQAP) since the group said it was behind a failed December 25 attempt to blow up a Detroit-bound U.S. airliner.

The officials said security forces were scouring rugged mountains in a manhunt for 25 militants who fled raids on Tuesday in the southeastern province of Shabwa.

They said Abdullah al-Mehdar, identified as the leader of an al Qaeda cell in Shabwa, was killed overnight in a fierce gunbattle with security forces surrounding his house.

Four militants were arrested on Tuesday and others escaped, the officials said. One said the Yemeni soldiers might have been ambushed in retaliation for the overnight security operation.

Foreign Minister Abubakr al-Qirbi told Reuters Yemen needs security assistance from the United States and other allies to help it combat al Qaeda, but that the impoverished Arab country needs economic rescue to ensure long-term success.

Our security agencies are capable of tackling terrorist threats, he said, adding that anti-terrorism and coastguard units needed outside support in training, equipment and exchange of intelligence information.

However, a security or military solution is not sufficient. So the international community has to pay more attention to the economic and development needs of Yemen, Qirbi said.

Violence has also intensified in a separate conflict in the north, where the interior ministry said at least 15 rebels had been killed over the past two days in clashes with pro-government tribesmen and in Yemeni security operations.

Iranian President Mahmoud Ahmadinejad denounced the role of Saudi Arabia, which joined the fighting against the Shi'ite rebels on the Saudi-Yemeni border in November, saying Riyadh should use its military power against Israel instead.

We were expecting that Saudi Arabian officials act like a mentor and make peace between brothers, not that they themselves enter the war and use bombs, cannons and machineguns against Muslims, Ahmadinejad said in a televised speech.

Yemen, whose five-month-old offensive has failed to crush the rebels, says they get support from Iran, a charge it denies.

Ahmadinejad also said he believed the United States, Britain and Israel were behind the Yemen conflict, aiming to set the whole region on fire in a bid to dominate the Middle East.

I hope that my Yemeni brothers sit down and talk and negotiate and solve the problems, he said.

The Iranian leader was speaking a day after a Saudi defence official said Saudi forces had killed hundreds of Yemeni rebels in a slice of Saudi territory. Four Saudi soldiers were killed.

I don't know where he (Ahmadinejad) got this accusation ... that the kingdom is waging war on the Houthis, Saudi Foreign Minister Prince Saud al-Faisal said.

The real accusation is that Iran is the one that meddles in Yemen's internal affairs he told reporters in Riyadh.
The Houthis, named after their leaders' clan, say they had crossed the border in November only because the kingdom was letting Yemeni forces use its territory to attack them.

Yemeni authorities said on Tuesday their forces had killed 19 rebels and arrested about 25 in house-to-house raids in another part of the north in a continuing operation dubbed 'Blow to the Head'. They did not say when the deaths occurred.

The Houthis, who belong to the minority Shi'ite Zaidi sect -- as does President Ali Abdullah Saleh -- have reported heavy Saudi air strikes and Yemeni mortar attacks in recent days. They say civilians have borne the brunt of the fighting.

A Yemeni military jet crashed on a training flight near the southern city of Aden. The pilot was missing, an official said.

The United Nations refugee agency says the northern conflict has affected an estimated 200,000 people since 2004, including those displaced since the government's August offensive began.

Saudi Arabia, a key ally of Yemen, fears that instability in its populous neighbour will allow al Qaeda militants to use safe havens there for attacks on the world's biggest oil exporter.

Yemen's foreign ministry, whose government has flirted with the idea of dialogue with the Islamist militant network, said al Qaeda would have to lay down its weapons first.

Any dialogue with al Qaeda will be a part of a programme adopted by the government to open the door for those deceived elements to renounce violence and return to the right path and get involved in their community as good citizens, a foreign ministry spokesman said, according Yemen's state news agency.

Qirbi, the foreign minister, said Yemen was ready to end the war in the north if the rebels accepted government terms.
If the rebels abide by the six conditions set by the government and start to implement them, then we are prepared to deal with all legitimate demands raised by Houthis provided that those demands do not conflict with the constitution and law.

The Houthis, who rebelled against the government in 2004, complaining of social, economic and religious marginalisation, have rejected cease-fire conditions set by the government.

(Additional reporting by Souhail Karam in Riyadh; writing by Alistair Lyon; editing by Samia Nakhoul)