SANAA, Sept 3 (Reuters) - Yemen will partially restore a fuel subsidy from Thursday in an attempt to calm anti-government protests in the capital that have threatened to destabilize the impoverished Arab state, according to the cabinet.
The plan to ease petrol prices by about 30 percent has however failed to mollify the Shi'ite Houthi rebel group, which also rejected a proposal - still on the table - by president Abed Rabbu Mansour Hadi on Wednesday to form a unity government.
A decision to slash the subsidies in July enraged backers of the militant group, whose supporters on Wednesday shut roads around key ministries.
"(The cabinet) expressed its full understanding of the suffering of the people and its keenness to take all the necessary measures to mitigate side effects in correcting the prices of oil derivatives," ministers said in a statement.
The state had struggled to pay the subsidies, which were a boon to impoverished citizens.
The United States and energy-rich Gulf allies fear for the stability of Yemen, which sits astride key shipping lanes, is battling a fierce al Qaeda insurgency and contains many of the same sectarian faultlines which have ravaged other Arab lands.
Government sources told Reuters that communications between the Houthis and officials were continuing; but the group's rejection of an ambitious offer by President Hadi to dismiss his government and form a new one including Houthi ministers raises the prospect of the standoff descending into violence.
The cabinet statement described the Houthi protesters as "militias" while demonstrators say the government is corrupt and lacks legitimacy.
Security in Yemen largely unravelled after Arab Spring protests ousted veteran autocrat Ali Abdullah Saleh in 2011 and Hadi took his place in a transition shepherded by the United Nations.
(Reporting By Mohammed Ghobari and Noah Browning; editing by Ralph Boulton)