Dozens of people were killed overnight in running gun battles between opposition groups and state security forces in the capital Sanaa as the unrest threatened to escalate into a civil war.
Sanaa's residents were said to be fleeing the city in their hundreds to escape the violence which has left at least 40 people dead since Monday.
Defence Ministry sources said 28 people had been killed in an explosion at an ammunition store reportedly used by the Al-Ahmar tribe who have joined the opposition to force an end to President Ali Abdullah Saleh's 33-year-long rule.
Saleh has ordered the arrest of the tribe's leader Sheikh Sadiq al-Ahmar, accusing him and his family of trying to drag the country into civil war. "They bear responsibility for shedding the blood of innocent civilians," Saleh said.
"Yemen, I hope, will not be a failed state or another Somalia." he added. "The people are still keen for a peaceful transition of power."
As a result of the escalating violence, the United States has ordered its non-essential staff and their families to leave Yemen. In a travel alert the State Department warned Americans "of the high security threat level in Yemen due to terrorist activities and civil unrest."
The clashes erupted after Saleh refused on Sunday to sign a power transition deal for the third time. The deal, brokered by the Gulf Cooperation Council (GCC), aims to end four months of anti-government street protests by calling for Saleh to leave power within a month in exchange for legal immunity.
Saleh claimed that he was willing to negotiate a peaceful solution to Yemen's political crisis. However, he refused to give in to further demands by the opposition.
"I am ready to sign within a national dialogue and a clear mechanism," Saleh said. "If the mechanism is sound, we will sign the transition of power deal and we will give up power."
"No more concessions after today," he added.
Saleh said he would remain in Yemen after turning over the presidency.
"I will preside over my party and I will be in the opposition," he said.
Meanwhile, the United States has urged Saleh to sign the transition deal.
"Saleh has an agreement in front of him," State Department spokesman Mark Toner said. "He needs to sign it and put Yemen on a positive path so that they can resolve the current situation."
The GCC expressed alarm that the on-going violence in the Yemeni capital could further undermine political stability.
"The fighting in Sanaa during the past two days is a source of concern for the GCC who fear that it may spread," GCC Secretary General Abdullatif al-Zayani said.
Saleh is a key ally of the United States in its war on terrorism. Al Qaeda in the Arabian Peninsula (AQAP), considered by Washington to be al Qaeda's most dangerous branch, conducts operations out Yemen.
Yemen has an estimated 60 million firearms in private hands - roughly three for every citizen - and borders the world's largest petroleum exporter, Saudi Arabia.
Author: Spencer Kimball (AFP, Reuters, dpa)
Editor: Rob Mudge