Yemen's military has sent extra forces to a town seized by Islamists last week after negotiations with the militant group's leader broke down, residents and witnesses said on Monday.

Tanks and armoured vehicles were making their way towards Radda, about 170 km (105 miles) southeast of the capital Sanaa, a day after outgoing President Ali Abdullah Saleh left Yemen to seek medical treatment in the United States.

A year-long uprising against Saleh has been punctuated by bursts of open combat between his troops and those of a rebel general and tribal militiamen, while militants have exploited weak government control to grab territory, notably in the southern province of Abyan.

Islamist militants entered Radda a week ago, led by Tareq al-Dahab, a relative of U.S. citizen Anwar al-Awlaki, whom Washington accused of a main role in the Yemeni branch of al Qaeda and assassinated in a drone strike last year. Witnesses said the military had sent heavy armour to the town on Monday.

Neighbouring Saudi Arabia and the United States - which long backed Saleh as a key to its counter-terrorism policy - fear political paralysis over Saleh's fate could embolden al Qaeda's regional, Yemen-based wing.

They supported plans to end his 33 years in power by granting him immunity from prosecution over the deaths of protesters in the uprising.

Saleh, who formally handed power to his deputy Abd-Rabbu Mansour Hadi in November, headed to the United States on Monday for medical treatment, after travelling to Oman on Sunday, the state news agency Saba said. Saleh said in a parting speech he would return to Yemen.

Gunmen fired on a main oil pipeline in an area southwest of the capital Sanaa on Monday, setting it on fire, the Interior Ministry said on its website.

It was the second attack this month in the area on the pipeline, the ministry said. The line, which carries crude from oilfields in Maarib province to export facilities on the Red Sea coast, has been repeatedly blown up by disgruntled tribesmen.

TALKS FALL THROUGH

Dahab had said he would withdraw from Radda on condition that Islamic law was enforced there and that jailed comrades and his brother Nabil were released. But talks fell through.

As we were leaving Radda we saw 15 tanks and more than 20 armoured vehicles heading for one of the military bases on the west side of town, one witness called Abdallah said on Monday.

Another said soldiers at checkpoints outside the town said the reinforcements were meant to back an attack on the town.

A tribal official involved in negotiating with Dahab on the government's behalf said other tribesmen were taking positions in the town and getting ready to fight.

The fighters are equipped with machine guns, mortar shells, rocket-propelled grenades and shoulder-borne rockets. Shop owners have moved their goods into storehouses outside the town and the situation could explode at any moment, he said.

Militants shot dead a prison officer on Monday in Dhamar province, just south of Sanaa, a security official told Reuters.

Earlier, a spokesman for the militant group Ansar al-Sharia (Partisans of Islamic law) said militants had ambushed and killed the head of the prison.

A military committee set up to normalise the situation after Saleh stepped down called on military and security bodies to release all those detained during the anti-Saleh protests in the past year, the Saba news agency said.

The World Bank on Monday lifted a funding freeze to Yemen and said it would resume relations with the new government. It closed its office in March due to unrest.

Hadi, whom parliament has endorsed as sole candidate in an election to pick Saleh's successor next month, spoke on Sunday to U.S. counterterrorism chief John Brennan, who promised U.S. support, state news agency Saba reported.

Despite his departure, many Yemenis fear Saleh and his supporters will continue to hold sway over the country.

Hundreds of air force officers and staff gathered outside Hadi's residence on Monday demanding the resignation of their commander, Saleh's half-brother, whom they accuse of corruption.

Workers at the al-Anad air base in the southern province of Lahej went on strike and said they would not resume work until General Mohammed Saleh al-Ahmar resigned, a worker there said.

(Additional reporting by Mohammed Mukhashaf in Aden; writing by Isabel Coles; editing by Myra MacDonald)