Factbox: Key political risks to watch in Yemen

DUBAI (Reuters) - Political unrest and economic deterioration continued to plague Yemen ahead of the February 21 presidential election many hoped would give Yemen a chance to bring about reforms that could help the country recover from a year of protests.

President Ali Abdullah Saleh, bowing to mass protests demanding he step down, signed a deal last year crafted by Yemen's wealthy Gulf Arab neighbors and handed over his powers to his deputy, Abd-Rabbu Mansour Hadi.

Under the accord, Hadi was nominated to run uncontested as a consensus candidate in the vote -- a move that has unsettled many Yemenis who feel that the vice president, long Saleh's right-hand man, does not represent their interests.

Yemeni protesters say the deal has been too generous towards Saleh; granting him immunity from prosecution, keeping his General People's Congress (GPC) party in power through a unity government with the opposition and leaving relatives in charge of key military and security forces.

Hadi hoped that a large turnout in the election would give him legitimacy for major reforms he is expected to carry out during a two-year-interim period, including drafting a new constitution and restructuring the armed forces.

Yemen continues to face numerous challenges, ranging from a violent insurgency by militants linked to al Qaeda in the south to Shi'ite Muslim rebels in the north. Yemen also faces a growing secessionist movement seeking to revive a southern socialist state that Saleh unified with the north in 1990.

Many southerners, who view Sanaa's rule as an occupation, planned to boycott the February 21 vote, raising worries about a low turnout that could undermine Hadi's legitimacy.

The United States and Saudi Arabia, who back Hadi's ascendance to power, fear that little public support combined with a deeply divided government and Saleh's prospective return to Yemen after the election could foil his successor's agenda to introduce the constitutional and legal reforms needed to transform Yemen during the two-year transitional period.

Militants suspected of ties to al Qaeda's Yemen wing pose another serious challenge for Yemen. They have been holding a number of southern towns seized last year during the unrest.

Washington and Riyadh, both targets of failed attacks by al Qaeda's Yemen-based wing, fear that lawlessness in Yemen is giving the global militant network space to plan and launch attacks in the region and beyond.

Most recently, they launched an attack that killed an election official and a leader of the elite Saleh-backed Republican Guard.

In January, Yemen's information minister escaped an assassination attempt when gunmen sprayed his car with bullets as he left a cabinet meeting in the capital. That same day, twelve militants, including a local al Qaeda leader, were killed by a U.S. drone strike.

In February, militants attacked a Yemeni army base in the southern city of Lawdar. They also executed three men for allegedly supplying U.S. intelligence with information used to carry out drone strikes in the area.

Al Qaeda is also believed to be behind attacks on oil pipelines that have hampered the country's oil industry, which analysts say accounts for 60 percent of its income.

Although Yemen is a small oil producer, its proximity to the world's top crude exporter, Saudi Arabia, and to vital shipping strait Bab al-Mandab raises risks for world crude supplies.

Deteriorating economic conditions have led workers across the country to strike on various occasions, further eroding the economy. A strike by workers in the Masila oil field halted Yemeni oil production and exports last week. At least one oil company promised to resume production after days of being idle.

Violence and economic hardship have displaced around half a million people in Yemen. Tens of thousands, fleeing battles between the government and al Qaeda-linked militants, have taken refuge in the port city of Aden, which has seen a spate of attacks on security officials in recent months.

At least seven foreign workers were kidnapped then released by local tribesmen in January and February. Some embassies have withdrawn diplomats and many foreign donors have turned away.

What to watch:

- Fragmentation as the state loses control of more territory to rebels or militants

- Attempt to sabotage transition

- Escalation in street protests

ISLAMIST MILITANCY AND THE AL QAEDA ISSUE

Saleh's opponents have repeatedly accused the outgoing president 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 the main base for al Qaeda in the Arabian Peninsula (AQAP), which has emerged as one of the network's most active and ambitious branches after setbacks in Saudi Arabia and Iraq.

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.

Last month, al Qaeda militants briefly seized the town of Radda in al-Baydah province, 170 km (105 miles) from Sanaa, underscoring the militant group's ability to expand its control in the southern part of the country.

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 SEPARATISTS, NORTHERN REVOLTS

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

Their grievances, however, will pose a serious headache for post-Saleh Yemen, and a 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 Sunni Muslim-ruled Saudi Arabia, which intervened militarily against the Shi'ite rebels in 2009. Saleh's forces 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 that prevail in Saudi Arabia. Salafis brand Shi'ites as heretics.

At least 32 people were killed in clashes between the Houthis, local tribesmen and militants from a Sunni Islamist group in two separate incidents in January and February.

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

In the south, many openly question the benefit of unity with the north and promised to boycott the February 21 election in a show of defiance. At least one southern polling station was bombed a day before the vote.

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. The United Nations Children's Fund (UNICEF) says 57 percent of Yemen's 12 million children are chronically malnourished -- the highest level of chronic malnutrition in the world after Afghanistan.

Protests in 2011 saw unemployment rise to an estimated half of the labor force, with tens of thousands of Yemenis losing their jobs. The price of basic commodities like rice jumped by as much as 60 percent. Even before protests, some 40 percent of the people lived on less than $2 a day.

The International Monetary Fund and World Bank began engaging with Yemen once more in January, months after freezing financial support due to political unrest in the country.

Yemen is suffering 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.

A strike by workers demanding more pay in government-owned Masila Petroleum, which controls a major pipeline that pumps the little oil Yemen is still producing, halted nearly all Yemeni oil production and exports last week.

Oil companies in the field are trying to recover from the disruption, with at least one firm saying it will resume production after days of being idle.

What to watch:

- More disruption to oil and gas activities

- Pressure on rial, government funding problems

- Salary cuts fuelling further strikes, poverty

(Compiled by Nour Merza; editing by Sami Aboudi)