FACTBOX-Key political risks to watch in Yemen

DUBAI, Jan 18 (Reuters) - A pact to avert civil war in Yemen by sidelining President Ali Abdullah Saleh has done little to settle the impoverished country's internal conflicts, and fanned rage against an interim government that would give Saleh immunity from prosecution.

The deal Saleh signed last year was crafted by Yemen's Gulf Arab neighbours with both U.S. and U.N. backing. It calls on Saleh to hand power to his deputy in the hope of ending nearly a year of turmoil, ranging from mass protests to fighting between his forces and those of a rebel general and tribal notables.

Under the deal, Saleh's General People's Congress (GPC) and opposition parties agreed to divide cabinet posts between them, forming a unity government to lead the country towards a presidential election next month.

By then, the interim government is to have separated forces loyal to Saleh from their foes in the capital Sanaa and elsewhere, and moved to restructure Yemen's military.

The deal is silent on the fate of Saleh's nephew Yehia, who leads Yemen's Central Security Forces, and on the president's son Ahmed Ali, who commands the Republican Guards - one of the country's best-equipped units, and part of longstanding ties with Washington, which backed Saleh as part of its "counterterrorism" strategy.

Those forces killed nine protesters in December demanding that Saleh and his inner circle - including relatives in key economic and bureaucratic posts during Saleh's 33-year rule - face trial for killings of protesters during the uprising.

Parliament has yet to approve the immunity law, which has led the youth protesters who have spent a year in the streets to denounce the interim government headed by an opposition leader as partners to what they regard as Saleh's crimes.

The struggle over Saleh's fate has shaken already loose state control over swathes of Yemen, including the north where Saleh tried and failed to crush a revolt and the south where turbulent union under his rule ushered in a 1994 civil war.

Militants suspected of ties to al Qaeda have come to the fore during the unrest, seizing several towns in Yemen's south. The most recent Islamist advance prompted a Saleh-allied minister to say the presidential vote might be delayed.

Tens of thousands of people have fled the violence, taking refuge in the port city of Aden, which has seen a spate of attacks on security officials in recent months. Some half a million people have been displaced by Yemen's several conflicts.

The United States and Saudi Arabia, both targets of failed attacks by al Qaeda's Yemen-based wing, fear lawlessness is giving the global militant network space to plan and perhaps carry out attacks in the region and beyond.

Instability in Yemen, next to the world's top oil exporter and near the mouth of a vital shipping strait, Bab al-Mandab, raises risks for world crude supplies.

Against a backdrop of dwindling resources, deteriorating security across the country has interrupted development work and oil flows - a vital source of revenue for Yemen.

Some embassies have withdrawn diplomats and many foreign donors have turned away.

What to watch:

- Fragmentation as the state loses control of more territory

- Attempt to sabotage transition

- Escalation in street protests

ISLAMIST MILITANCY AND THE AL QAEDA ISSUE

Saleh's opponents repeatedly have accused him of manipulating the threat of militancy and even encouraging it to scare Washington and Riyadh into backing him as a bulwark against al Qaeda.

Yemen is a base for the most active branch of the group, al Qaeda in the Arabian Peninsula (AQAP), which has plotted abortive attacks abroad from Yemen.

Although AQAP appeals little to most Yemenis and did not figure in the anti-Saleh protest movement, it has taken control of parts of three Yemeni provinces including Abyan, near a shipping lane that channels some 3 million barrels of oil daily.

Earlier this week, dozens of dozens of militants entered the town of Radda in the province of al-Baydah, expanding militant control outside Abyan, where they had captured several towns since the uprising against Saleh began early last year.

Washington assassinated Anwar al-Awlaki, a U.S. citizen it accused of a leadership role in AQAP, in a drone strike last year. AQAP has vowed to bleed U.S. resources with small, cheap attacks that draw responses costing billions of dollars.

What to watch:

- AQAP moves to exploit gaps left by central authority

- Any AQAP retaliation for the killing by U.S. forces of Osama bin Laden in Pakistan and Awlaki in Yemen

SOUTHERN SEPARATIST AND NORTHERN REVOLTS

Until now, the protests against Saleh have eclipsed earlier challenges to his rule by northern Muslim Shi'ite rebels and southern secessionists.

Their grievances, however, will pose a major challenge for post-Saleh Yemen and failure to deal with them equitably could lead to further violence and instability.

North and South Yemen formally united under Saleh's leadership in 1990. But many southerners complain northerners have discriminated against them and usurped their resources - most of Yemen's fast-declining oil reserves are in the south.

"Houthi" rebels - who draw their name from a tribal leader - control Saada province bordering Saudi Arabia, which intervened military in Yemen in 2009. Saleh's forces - including a unit now dedicated to his ouster - had failed to crush them then.

Fighting has flared in recent weeks between the Houthis, who are members of the Zaydi branch of Shi'ite Islam, and Salafis - Sunni Muslims whose puritanical creed mirrors doctrines current in Saudi Arabia, and classes Shi'ites as heretics.

The Houthis accuse their foes of getting arms from Saudi Arabia, as part of a campaign of mobilisation against Shi'ites the kingdom regards as a fifth column for Shi'ite Iran.

In the south, many people openly question the benefit of maintaining unity with the north and hardline leaders of a five-year-old secession movement say their time is nigh. The national unity government has released the movement's leader, Hasan Baoum, in what was seen as a goodwill gesture.

What to watch:

- An increase in separatist or sectarian rhetoric

- Further territorial fragmentation during turmoil

- Proposals for federal system to resolve regional tension

DECLINING ECONOMY, RESOURCE CRUNCH

Prolonged turmoil has crippled the economy of a country of 24 million people with limited natural resources. A U.N. and government survey found a third of children in Yemen suffer from moderate to acute malnutrition.

The country, which ranked 154 out of 187 in a U.N. survey of development, has an unemployment rate some analysts estimate at 50 percent. Even before protests, some 40 percent lived on less than $2 a day.

Yemen suffers a severe water crisis - Sanaa is expected to be the world's first capital to run dry, in around a decade. It is also grappling with fuel shortages due to the unrest and attacks on oil pipelines by tribesmen and militants.

Aside from the impact of unrest on Yemen's energy sector, crude output was declining steadily to 298,000 barrels per day in 2009, from a peak of 457,000 bpd in 2002, according to BP.

What to watch:

- More disruption to oil and gas activities

- Pressure on rial, government funding problems (Joseph Logan)