SANAA President Ali Abdullah Saleh returned to Yemen after a three-month absence calling for an end to heavy fighting on Friday, but opponents said they feared more bloodshed and the United States demanded he relinquish power.
Saleh, who went to neighbouring Saudi Arabia for medical treatment in June when he suffered severe burns in an assassination attempt, urged a ceasefire between his supporters and opponents to halt five days of fighting in the capital Sanaa.
His reappearance raised big questions over the future of the fractious Arabian Peninsula state, which has been paralysed by protests against his 33-year rule since January.
In Washington, White House spokesman Jay Carney said: "We urge President Saleh to initiate a full transfer of power and arrange for presidential elections to be held before the end of then year.
"The Yemeni people have suffered enough and deserve a path towards a better future."
In Sanaa this week, a months-old standoff between loyalist troops and forces backing anti-Saleh protesters erupted into a full-blown battle that killed more than 100 people in five days.
Yemen, one of the region's poorest, also faces a worsening insurgency by al Qaeda militants, an uneasy truce with Shi'ite fighters in the north and separatism in the south.
Moments after state television's announcement of Saleh's return, Sanaa's streets erupted with bursts of gunfire and fireworks. Shelling occurred in the capital's Hasaba district.
Anti-Saleh protesters said they came under fire as they announced plans for a march on Saturday to crowds in "Change Square" where thousands have been camped out for months.
Saleh called for a ceasefire and peace talks.
"I return to the nation carrying the dove of peace and the olive branch," Saleh was quoted as saying by state television.
Opponents saw his return as an attempt to rally for war and said they expected more bloodshed, while his supporters reacted with joy and said he could restore order.
"I'm so excited," said Akram al-Aghbari, a doorman. "He is an honourable and great man. I know he's coming to stop this terrible violence. People here without him only know how to rule with weapons, but with him back, just you watch."
Abdulghani al-Iryani, a political analyst and co-founder of the Democratic Awakening Movement, said violence lay ahead.
"This is an ominous sign. Returning at a time like this probably signals he intends to use violence to resolve this. This is dangerous," said Iryani.
"His people will feel that they are in a stronger position and they will refuse to compromise. Basically this means the political process is dead in the water."
Thousands gathered at a pro-Saleh rally waving flags, beating drums and honking horns. Radio stations played celebratory music and a TV newsflash warned people not to fire into the air in celebration in case stray bullets hit bystanders.
In Sanaa's 70 square, a hub for pro-government Yemenis, the imam leading prayers said: "The president returned, the heart beat of Yemen returned, happiness returned, love returned, logic returned."
Many Yemenis thought they had seen the last of Saleh when he flew to Saudi Arabia in June for medical treatment after a bomb explosion at his palace left him with severe burns.
Saleh had been involved in negotiations mediated by Gulf states to leave office, repeatedly promising to step down only to change his position at the last minute.
The United States said on Friday it wanted Saleh to sign the accord promoted by the Gulf Cooperation Council.
"I can't believe he came back. He shouldn't have come back," said Yasser, a hotel cleaner. "Us regular people, we are so sick of all of them: the opposition and the government. Can't they see they're going to ruin this country?"
Two members of Saleh's General People's Congress party denied opposition statements that his return spelled the end for the Gulf-brokered power transfer plan, which would see him hand interim power to Vice President Abd-Rabbu Mansour Hadi.
"This initiative remains effective and Hadi will continue the dialogue to create a binding mechanism to implement the Gulf initiative," Yasser al-Yamani told al Jazeera television.
The Gulf initiative envisages Saleh standing down three months after signing it. He agreed three times to earlier drafts of the deal only to back out at the very last minute.
A high-level negotiator, who declined to be named, told Reuters he had not expected Saleh's return, but that dealing with the president face-to-face might make negotiations easier.
Regional power Saudi Arabia, which shares a porous 1,460 km border with Yemen, has been a key player in Yemen for decades, offering support to Saleh's government to keep al Qaeda at bay and spearheading regional talks on a power transfer.
Some analysts say Saudi Arabia might not have let Saleh return unless a deal is likely.
"I'm sure he talked of his return with (Saudi Arabia's) King Abdullah during their meeting (on Monday night)," said Ghanem Nuseibeh, an analyst and partner at Cornerstone Global consultants in London.
"The Saudis would want that if he goes, then any transition of power is in their interests and doesn't bring about an anti-Saudi government. If there wasn't anything for them they wouldn't have let him go."
Gulf Cooperation Council Secretary General Abdbullatif al-Zayani flew to Sanaa this week to try and resurrect the deal but left after two days with nothing to show for his efforts.
(Additional reporting by Mohamed Sudam; Writing by Reed Stevenson; Editing by Ralph Gowling)