* Yemen offensive unlikely to settle northern revolt
* U.S. truce call signals scepticism on military solution
* Conflict home-grown despite alleged outside meddling
SANAA, Aug 24 (Reuters) - Yemen's latest assault on Shi'ite rebels in the north seems unlikely to end a conflict that has flickered for five years and inflicted thousands of casualties.
It may only deepen instability in an impoverished country also struggling with southern separatists, al Qaeda militants and a disastrous mismatch between fast-depleting oil and water resources and explosive population growth, analysts say.
The well-armed rebels, operating in rugged mountainous terrain, are led by Abdul-Malek al-Houthi, whose group embodies a revivalist strand of the Zaydi branch of Shi'ite Islam.
"The government has attempted to link the three crises -- the southern secessionists, the Houthis and al Qaeda -- as one: almost a domestic axis of evil," said Gregory Johnsen, a Yemen scholar at Princeton University on a visit to Sanaa.
He said he had seen little evidence of any connections, other than rhetorical points by al Qaeda propagandists.
The northern province of Saada near the Saudi border is off-limits to all but relief agencies, but Sanaa's two million people get daily reminders of the war as MiG fighters roar off on bombing sorties and trucks packed with conscripts head north.
The media blackout makes it impossible to assess the scale of death, destruction and displacement, although hundreds of people have been reported killed or wounded on both sides since clashes intensified into full-scale battles late last month.
U.N. agencies said on Friday more than 100,000 people had fled their homes and a humanitarian crisis loomed.
Past attempts to mediate in the conflict, notably by the Gulf state of Qatar, have failed to bring lasting peace.
The U.S. embassy on Sunday urged both parties to return to last year's ceasefire pact -- a clear signal that one of Yemen's main external allies sees no prospect of decisive military success for President Ali Abdullah Saleh's government forces.
Yemeni Foreign Minister Abubakir al-Qirbi told Reuters last week that the Houthi insurgents had taken Saleh's unilateral declaration in July 2008 that the war was over as a "sign of government weakness" and had provoked the latest fighting.
"It really seems to be the Houthis who kicked it off," said a senior Western diplomat. "The government doesn't need another Houthi conflict right now. They are really strapped for cash and there are pressures on the security forces around the country."
The government began a short-lived effort to launch reconstruction after last year's ceasefire and had mostly avoided stirring trouble with the Saada-based rebels, he said.
However, after months of renewed clashes, Saleh now appears to have ignored international advice about the difficulty of crushing tribal guerrillas with air power, tanks and artillery.
Instead Yemen's president has staked out an uncompromising position, setting tough ceasefire terms and promising decisive action to end "this sedition", which he described as cancer.
Some Yemeni officials suggest that Shi'ite-dominated Iran is backing the rebels, while Iranian media say aircraft from the Sunni kingdom of Saudi Arabia have bombed Houthi positions.
Both countries deny the charges and Western diplomats say they have seen no convincing evidence of any such involvement, although they do not exclude the possibility that the Houthis are getting funds from Shi'ite sympathisers abroad.
Iran called on Monday for a political solution to the fighting, which it said was an internal Yemeni issue.
Some Yemeni analysts say the Houthis have forged links with Iran and with Lebanon's Shi'ite Hezbollah movement. Others point to Saudi funding of the Sanaa government and local tribes.
The foreign dimension remains murky, but the conflict is essentially home-grown and has complex roots that stretch back to the 1962 overthrow of a 1,000-year-old Zaydi imamate.
Zaydis are a tribal minority whose brand of Shi'ism has coexisted easily in the past with Yemen's majority Sunnis.
But sectarian tensions emerged in recent decades as Zaydi revivalists stressed theological distinctions and rites in response to growing influence of Salafis, Sunni fundamentalists inspired, if not actively backed, by neighbouring Saudi Arabia.
The Houthis embarrassed Saleh, who aligned Yemen closely with Washington after the Sept. 11, 2001 attacks, by shouting "Death to America, death to Israel, a curse on the Jews, victory to Islam" in his presence in a Saada mosque in January 2003.
Saleh, himself a Zaydi, pursued the movement's then leader Hussein al-Houthi, who was killed by security forces in September 2004, only for fresh rounds of fighting to erupt.
A report by the International Crisis Group in May said the conflict, which it traced to historical grievances and endemic underdevelopment, had become self-perpetuating.
"Tribal leaders and senior officials have amassed military hardware and profit from illegal sales of army stockpiles," the report said. "Continued operations have justified increased military budgets, without government or independent oversight."
The recent fighting has spread beyond Saada into Amran and Hajjeh provinces. It briefly lapped even closer to Sanaa last year, but poses no immediate military threat to the capital.
Nevertheless, the revolt could have an ominous impact unless it is defused by local, regional or international action.
"If it suddenly started to become a plausible rallying point for anti-government, anti-regime sentiment, it might acquire a momentum which is difficult to stop," the Western diplomat said. (Editing by Charles Dick)
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