* National dialogue meant to pave way for free elections
* Southern secessionists prefer two-region solution
By Mohammed Ghobari
SANAA, Dec 24 (Reuters) - Three leading Yemeni parties have rejected a proposal to turn the country into a federation of semi-autonomous regions, in the latest blow to a national dialogue designed to put Yemen on track to democratic elections.
The national dialogue, launched in March as part of a 2011 Gulf-brokered power transfer deal that eased long-serving president Ali Abdullah Saleh out of office, has been struggling with demands by southern separatists to restore South Yemen, which merged with North Yemen in 1990.
Lack of progress has raised Western concerns that the power transfer deal could unravel, deepening nationwide turmoil, boosting al Qaeda militants and unsettling adjacent oil-exporting heavyweight Saudi Arabia.
The three parties rejecting the proposal were the former South Yemen's Socialist Party, Saleh's General People's Congress and the southern Nasserist party, said Abdullah Noman, a member of a committee responsible for drafting the plan.
Noman told Reuters the proposal had not fixed the number of provinces into which the new federation is to be divided - a key stumbling block in the national dialogue.
The Saba state news agency said Yemeni President Abd-Rabbu Mansour Hadi would chair a panel to decide that issue.
Some southern secessionists are hoping to divide the country into two major regions, with the south having significant control over its own affairs. But a number of northern Yemeni parties favour a multi-region federation.
Southerners fear that having several regions would dilute their authority and deprive them of control over major southern provinces such as that of Hadramout. Most of Yemen's oil reserves are in the south.
Yassin Noman, head of the Yemeni Socialist Party, said his party had declined to participate in a signing ceremony for the regional plan which took place on Monday evening with the support of the United Nations' Yemen envoy Jamal Benomar.
"If you insist on six provinces and are able to garner the majority of votes in the (national) dialogue conference, then go ahead with your plan," Yassin Noman said, referring to parties in favour of a multi-region federation.
Among those backing the regional proposal were a faction of the southern secessionist movement that supports Yemeni President Hadi and also Shi'ite Muslim Houthi rebels.
Yemen's north and its once-Marxist south united in 1990, but civil war broke out four years later in which then-President Saleh crushed southern secessionists and maintained the union.
Since then, the consequences of the conflict have fuelled southern demands for another partition or autonomy.
Hardliners of the al-Herak al-Janoubi, a coalition of groups formed in 2007 that aims to restore the southern state, view a two-region division of the country as a transitional period before holding a referendum on full independence.
Besides the secessionist movement, Yemen is also grappling with al Qaeda militants and with a rebellion in the north, which flared in October into clashes between Shi'ite Houthi rebels and Sunni Salafis in which more than 100 people were killed. (Writing by Mahmoud Habboush and Raya Atallah; Editing by Gareth Jones)