Violence in Taiz has threatened to derail the formation of the government [Reuters]

Mohammed Basindwa, Yemen's new prime minister, has said that an interim government intended to pull the country back from the brink of civil war will be formed in the next 48 hours.

The announcement on Tuesday came as forces opposing and loyal to President Ali Abdullah Saleh pulled back from some positions in the southern city of Taiz, after a bout of fighting there killed at least 20 people.

The violence has threatened to derail the formation of the government, a key element of a Gulf-brokered deal to end Saleh's 33-year rule which was signed by the president nearly two weeks ago.

Basindwa, a former foreign minister representing opposition parties who are to split cabinet posts with Saleh's party, told the Reuters news agency that he expected the government to be agreed on Wednesday night or the following day.

Last week, Basindwa said the opposition's commitment to the power transfer depended on ending the bloodshed in Taiz, a hotbed of protests against Saleh.

The Gulf Co-operation Council (GCC), a bloc of Yemen's richer neighbours in the region, shares US fears that the struggle over Saleh's fate could lead to chaos and embolden al-Qaeda's Yemeni branch.

'Guerilla war'

On Tuesday, the belligerents withdrew from some positions they held in Taiz, located about 200km south of the capital Sanaa, leaving residents to survey the devastation.

"The two sides are fighting a guerilla war. I lost all three of my businesses in 48 hours," said Mahmoud Hamid Sharaf, a
merchant speaking outside his warehouse of computer equipment.

He said fighters from the Republican Guard, a unit led by Saleh's son, had fought from the warehouse before looting it.

A committee tasked with implementing a ceasefire between the two sides moved through streets littered with buses wrecked by artillery shells, heaps of burning rubbish and shops with windows blown out by gunfire and shelling.

"We are trying desperately to demilitarize the city, to persuade the army to return to their barracks and the tribesmen
to go back to their villages, if this doesn't happen, Taiz will pay the price in blood," a member of the committee said.

Candidates agreed

The fighting came as the coalition of opposition parties that signed the power transfer deal with Saleh last month said
they had agreed on their candidates for an interim government.

Opposition figures have warned formation of a government could founder if the other side puts forth names linked to gross
abuses during the attempt to crush protests against Saleh, who will enjoy immunity from prosecution under the transition deal.

The government is to see Yemen through to presidential elections which Abd-Rabbu Mansour Hadi, the vice president to
whom Saleh has transferred his powers, has set for February 21.

Any post-Saleh government would face multiple challenges including resurgent separatist sentiment in the south, with
which Saleh's north fought a civil war in 1994 following their unification under his rule four years earlier.

The region is the site of conflict between government forces and Islamist fighters who have seized chunks of an entire
province, displacing as many as 100,000 people.

The UN voiced concern on Tuesday about the deteriorating situation in Yemen, despite the signing of the GCC
deal, and called on all factions in Yemen on Tuesday to cease attacks on civilians.