SANAA - Thousands of protesters gathered in front of the Yemeni vice president's residence on Tuesday, demanding the acting leader for wounded President Ali Abdullah Saleh form a transitional council to create a new government.

Outside the peaceful protest in the capital of Sanaa, battles raged in a southern town held by Islamist militants.

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Around 4,000 demonstrators in Sanaa, who have been calling for Saleh to step down for five months, called for a "million-man march" for him to stay in Saudi Arabia, where he has been treated for injuries since an attack on Friday.

"The people want to form a transitional council, we will not sleep, we will not sit until the council is formed," the protesters chanted.

Protesters carried banners saying "The blood of the liberated achieved victory", while others waved banners saying "Our revolution is Yemeni, not Gulf or American".

"We will remain in front of the residence of the vice president for 24 hours to pressure him for the formation of a transitional council," youth activist Omar al-Qudsi said.

"The era of Saleh has ended," he told Reuters.

Saleh, 69, was wounded on Friday when rockets struck his Sanaa palace, killing seven people and wounding senior officials and advisers in what his officials said was an assassination attempt. He is being treated in a Riyadh hospital.

The volatile situation in Yemen, which lies on vital oil shipping lanes, alarms Western powers and neighboring oil giant Saudi Arabia, who fear that chaos would enable the local al-Qaida franchise to operate more freely there.

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They see Saleh's absence for medical treatment in Riyadh as an opportunity to ease the president out of office after nearly 33 years ruling the impoverished Arab nation.

"We are calling for a peaceful and orderly transition," US Secretary of State Hillary Clinton said on Monday.

British Prime Minister David Cameron called Vice President Abu-Rabbu Mansour Hadi, appointed by Saleh as acting president, and pushed for a ceasefire.

Hadi has insisted that Saleh would return within days.

Saudi officials say it is up to Saleh whether he returns home or not, but they and their Western allies may want to revive a Gulf-brokered transition deal under which the Yemeni leader would quit in return for immunity from prosecution.

"Saleh's departure is probably permanent," said Robert Powell, Yemen analyst at the Economist Intelligence Unit.

"The Saudis, as well as the US and European Union, are pushing hard for him to stay in Saudi Arabia, as they view the prospect of his return as a catastrophe.

"Prior to his departure, the country was slipping inexorably into a civil war. However, his removal has suddenly opened a diplomatic window to restart the seemingly failed GCC-mediated proposal. It seems Saudi Arabia and other interested parties are unwilling to allow Saleh to derail it this time."

Yemeni forces claim to have killed dozens of Islamists in South

Saudi Arabia is worried by the activities of the Yemen-based al-Qaida in the Arabian Peninsula (AQAP), which has staged daring if not very effective attacks on Saudi and US targets.

The army said it had killed 30 Islamist militants including a local al-Qaida leader in the southern town of Zinjibar, capital of the flashpoint Abyan province.

A local official said 15 soldiers had been killed in the battles for control of the town seized by militants some 10 days ago.

Some of Saleh's opponents have accused the president of deliberately letting AQAP militants take over Zinjibar to demonstrate the security risks if he lost power.

The fighting has reduced Zinjibar, once home to more than 50,000 people, to a ghost town without power or running water.

Fighting also flared again in the city of Taiz, south of Sanaa, where anti-government gunmen have clashed sporadically with troops in the past few days.

A Saudi-brokered truce was holding in the capital after two weeks of fighting between Saleh's forces and tribesmen in which more than 200 people were killed and thousands forced to flee.

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