Yemen's vice president issued a decree Wednesday to set up a national unity government to prepare for elections, as fighting raged on the streets of the capital Sanaa.

The announcement by vice-President Abd-Rabbu Mansour Hadi paves the way for a unity government to be sworn in as part of a plan to end months of protests against outgoing President Ali Abdullah Saleh.

In the latest threat to a transition away from Saleh's 33-year rule, government forces traded artillery fire with tribal foes in Sanaa, witnesses said. One person was killed and more than a dozen were injured, according to the office of a tribal leader and Saleh opponent whose compound came under fire.

Under a Gulf-brokered power transfer plan signed in Saudi Arabia last month, Saleh's General People's Congress (GPC) party agreed to divide cabinet posts with its opponents in a coalition government headed by an opposition leader.

Mohammed Basindwa, a former foreign minister, was nominated to head the new government by opposition parties. The GPC retained the key portfolios of defence and foreign affairs, while opposition parties received the interior and finance ministries.

Basindwa told Reuters the swearing in would take place on Saturday.

Apart from preparing for the presidential election, set for February 21, 2012, the new government faces numerous challenges, such as restoring security, providing vital services disrupted by 10 months of mass protests and combating rising separatist sentiment in the south.

I think the government is going to find it very difficult to be able to function and govern the whole of the united country properly. It remains to be seen how the street will react to this new government and the south also in particular, said Ghanem Nuseibeh, an analyst and founder of the Cornerstone Global Associates consultancy.

The government must also deal with Islamist militants who have exploited the protests to strengthen their southern foothold.

Top oil exporter Saudi Arabia and the United States that a slide toward more chaos after the uprising against Saleh would embolden Yemen's al Qaeda wing, against which Washington has waged a campaign of drone strikes.

FIGHTING IN SANAA

Fighting raged in Sanaa Wednesday near government buildings and the compound of tribal leader Sadeq al-Ahmar, an arch-rival of Saleh. His office said one person had been killed and 13 injured in shelling by government forces on the al-Hasaba district.

Witnesses said shells had fallen on government buildings including the headquarters of state radio and the prime minister's offices as government forces fought Ahmar's men in their al-Hasaba stronghold.

Militants and army soldiers have been fighting near the Interior Ministry since dawn. They're using machineguns and RPGs, Abdul Rahman, a Sanaa resident, said by phone as gunfire reverberated in the background.

We are trapped in our homes and can't get out, he said. Residents of Sanaa said the streets were nearly empty in the affected districts.

The capital saw open warfare in May between Saleh's forces and those of Ahmar, a leader of the powerful Hashed tribal confederation, after Saleh pulled out of signing the transition deal backed by the Gulf Cooperation Council.

Last month Saleh bowed to international pressure and street protests demanding an end to chronic poverty, rampant corruption and lack of economic opportunity, and handed his powers to Hadi.

But the deal is threatened by fighting between Saleh's allies and enemies. In Taiz, 200 km (120 miles) south of Sanaa, the clashes have left at least 20 dead and led the United Nations to demand that government forces stop shooting protesters.

As fighting continued with al Qaeda-linked Islamists in the south, nine militants and four soldiers were killed Wednesday outside the city of Zinjibar, center of a province where the militants have seized swathes of territory, a local official said.

In Yemen's north, new fighting flared up Wednesday between Shi'ite Muslim rebels, whom Saleh's forces attempted to crush with Saudi help in 2009, and Sunni Muslim Salafi Islamists, a Salafi spokesman said.

The Salafis, who espouse a puritanical creed influential in neighboring Saudi Arabia, have said at least 25 people were killed late last month in attacks by Shi'ite Houthi fighters on a Salafi-run religious school in Saada province on the Saudi border.

The Houthis effectively control the province and are deeply suspicious of the Salafis, who deem Shi'ites heretics. They accuse the Salafis of attempting to build military camps near the border.

(Additional reporting by Isabel Coles in Dubai and Mohammed Mukhashaf in Aden; Writing by Nour Merza and Isabel Coles; Editing by Sami Aboudi and Maria Golovnina)