* Yemen to be split into six federal regions
* Not enough for southern separatists
* Step on road to new constitution, elections
By Mohammed Mukhashaf
ADEN, Yemen, Feb 10 (Reuters) - Yemen's president on Monday formally approved turning the country into a federal state, giving the south more autonomy and completing a milestone in his planned transition to democracy.
But the move was immediately rejected by some southerners who insist on a separate state, raising fears the impoverished country may face further instability on top of the challenges it already has from Islamist militants and a northern rebellion.
Demands by southern separatists to restore the state that merged with North Yemen in 1990 had delayed an agreement on broad reforms ahead of general elections.
Under the new system approved by President Abd-Rabbu Mansour Hadi, Yemen will be split into six regions.
The former South Yemen will be divided into two regions, Aden and Hadramout, according to state news agency Saba, and the more populous former North Yemen into four regions.
Under a U.S.-backed power transfer deal that forced former President Ali Abdullah Saleh to step down in 2012, Hadi is overseeing reforms for an interim period.
Political factions last month gave Hadi an extra year to finalise Yemen's status as a federal state and oversee drafting a new constitution that will form the basis for elections slated for next year. Work the constitution could not progress without an agreement on the shape of the Yemeni state.
Saba said a federal state comprised of six regions garnered the "highest level of agreement" against another proposal to divide the country into two regions, one in the north and one in the south.
Southern Yemeni leaders rejected the accord.
"What has been announced about the six regions is a coup against what had been agreed at the dialogue," said Mohammed Ali Ahmed, a former South Yemen interior minister who returned from exile in March 2012. "That is why I pulled out of the dialogue," he told Reuters.
Ahmed withdrew from the talks in November, and in December three other Yemeni parties rejected the proposal to turn the country into a federation.
Some southerners fear that having several regions would dilute their authority and deprive them of control over important areas such as Hadramout, where some of Yemen's oil reserves are found.
Nasser al-Nawba, a founder of the southern Hirak separatist movement, also rejected the deal, saying the only solution was for the north and south to each have their own state, as was the case before 1990.
"We will continue our peaceful struggle until we achieve independence. We are against violence," he said.
The 1990 union between the tribal North Yemen and the Marxist South soon went sour and a civil war broke out four years later in which then-President Saleh crushed southern secessionists and maintained the union.
Anna Boyd, senior Middle East analyst at IHS Country Risk, said that while the deal "closes the door on southern separatist ambitions", the government was unlikely to be able to re-establish control over most of Yemen's territory over the next year.
"Militant separatist factions will probably capitalise on the diminished capability of security forces in southern provinces, coordinate their efforts with other insurgent factions to acquire weapons and expertise, and increasingly resort to attacks targeting infrastructure, energy and security forces to further erode the government's authority over southern Yemeni territory," she said. (Writing by Yara Bayoumy; Editing by Sami Aboudi and Robin Pomeroy)