Heavy Saudi-led air strikes and ground combat between armed factions battered southern Yemen on Saturday, killing around 20 Iran-allied Houthi fighters and two rival militiamen, residents said.

The war threatens to turn Yemen into a failed state and spread sectarian strife in the Middle East, where the regional heavyweights - Sunni Muslim Saudi Arabia and Shi'ite Iran - are vying for influence.

Bolstered by more than two weeks of air raids led by Saudi Arabia, local armed groups have been resisting the southward advance of the northern-based Shi'ite Muslim Houthis.

Residents said southern fighters ambushed a convoy of Houthis and allied forces loyal to ex-president Ali Abdullah Saleh in a tribal area about 100 km north of their base in Aden, killing 15 of the northerners.

Inside the major port city, clashes erupted between Houthi forces and local militiamen firing rocket-propelled grenades and machineguns. Five Houthis and two local militiamen died, residents said.

In the city of Ataq east of Aden, residents reported some 10 air strikes on a military base housing pro-Saleh forces, blowing up ammunition dumps and sending huge fireballs into the air.

Warships believed to be from the Arab coalition shelled Houthi positions and a mountaintop military base run by soldiers loyal to Saleh near the city's airport.

Saudi Arabia, the world No. 1 oil exporter, is worried the bloodshed could spill over its border with Yemen, and over the influence of Iran, which has denied Saudi allegations that it has provided direct military support to the Houthis.

The Arab Spring uprisings of 2011 failed to produce stable democracies and instead gave rise to sectarian conflicts and Islamist militant groups seeking to seize power.

Yemen's conflict is one of the most complex. Saleh remains influential in the military, despite ceding power in 2012 after mass protests against his rule, and this has complicated efforts to stabilise the poorest Arab state.

While the Houthis deny getting help from Iran and say their armed campaign is designed to stamp out corruption and Sunni Al Qaeda militants, Saudi Arabia and its allies describe them as an Iranian-backed security threat.

The United Nations says the conflict, in which the Houthis seized the capital Sanaa in northern Yemen in September, has killed 600 people, wounded 2,200 and displaced 100,000 others.

Combat rages across a tangled front covering hundreds of miles of coastline, mountains and deserts. Almost three weeks of heavy street fighting and shelling in Aden has reduced historic pastel buildings beside the commercial port to charred husks.

Food, water and electricity are scarce in Aden. Fighting has cut off key roads linking it to the outside.

"Once this oven stops working, where will our bread come from? What will we eat? We ask God to provide," said resident Fadhl Mohammed outside a bakery in the Mansoura district.-Reuters