Yemen's northern rebels quit stronghold - source

SANAA/DUBAI (Reuters) - Yemen's Shi'ite rebels on Thursday withdrew from their stronghold of Saada city, two weeks into a ceasefire to end an insurgency that has also drawn in Saudi Arabia, a source in the truce committee said.

"Under an agreement reached between the committee supervising the ceasefire and representatives of the Houthi rebels, the fighters who were holed up in the old quarter have been allowed to leave with their weapons," the source told Reuters.

The rebels left the city, some 240 km (150 miles) north of the capital Sanaa, on condition they were masked, their routes unblocked and that they were not followed by security, the source added.

Yemen's government struck a truce on Feb. 11 with the insurgents who have battled it since 2004 over religious, economic and social grievances in the mountainous north. The war has displaced some 250,000 people.

Yemen, which also faces separatist unrest in the south, has shot to the forefront of Western security concerns since the Yemeni arm of al Qaeda claimed responsibility for a failed attempt to bring down a U.S. airliner over Detroit in December.

Earlier on Thursday, the rebels said the army was refusing to lift a siege on the city and preventing citizens from entering their homes. They also accused the army of re-installing military checkpoints on newly opened roads and blocking food supplies from entering war-damaged regions.

Members of the truce committee, made up of government and rebel representatives, said slow mine clearance operations were holding up the deployment of Yemeni troops along the Yemen-Saudi border, a key step demanded by both Sanaa and Riyadh.

Instability in Yemen is a major security concern to the United States and Gulf Arab countries, mainly Saudi Arabia, with which it shares a porous 1,500 km (940 mile) border.

Western powers and Riyadh fear Yemen is at risk of becoming a failed state where al Qaeda could exploit instability on multiple fronts to turn the country into a launchpad for attacks in the region and beyond.

SLOW DEPLOYMENT AT BORDER AREA

Hostilities in north Yemen appear to have significantly eased since the truce came into effect, although some violence and truce breaches have been reported.

Saudi Arabia, the world's top oil exporter, was drawn into the conflict in November after the insurgents seized Saudi border territory, accusing Riyadh of letting Yemeni troops attack them from Saudi ground. At least 113 Saudi soldiers were killed in fighting.

Riyadh had demanded rebels hand over five missing Saudi soldiers to prove they were serious about wanting a truce.

The rebels said they had told the truce committee that two Saudi soldiers believed held by insurgents had been killed in battle, and they had informed the committee of their location. The rebels have freed three other soldiers in recent days.

One member of the truce committee told Reuters the rebels had provided information about where the soldiers were buried, but another member said that was not the case.

While also contending with southern separatists, Yemen is trying to crush al Qaeda militants who have been recruiting and training in the country, emboldened by instability and weak government control in many regions.

(Writing by Cynthia Johnston and Jason Benham; Editing by Mark Trevelyan)