* Talks had been on verge of collapse
* UN makes fresh peace proposal
* Yemen govt had planned to quit talks
* War causes humanitarian disaster
CAIRO, July 31 (Reuters) - Seven Saudi troops and dozens of Houthi fighters were killed in heavy fighting on the border with Yemen, Saudi state news agency SPA reported on Sunday, as the main combatants in Yemen's war prepared for a further week of peace talks in Kuwait.
The U.N.-sponsored negotiations had been on the verge of collapse after a new row erupted last week between the Saudi-backed government and its Iranian-allied Houthi foes and renewed fighting broke out.
But U.N. Yemen envoy Ismail Ould Cheikh Ahmed said the talks between the Houthis and their General People's Congress party allies and the internationally-recognised government of President Abd-Rabbu Mansour Hadi had been extended by a week.
"We hope that the delegations can utilize this remaining week to achieve progress on the path towards peace," he said in a statement.
The slow-moving negotiations are aimed at ending a 16-month-old conflict that has killed more than 6,400 people, nearly half of them civilians, and displaced more than 2.5 million.
A truce that began in April has slowed the momentum of fighting, in which a Saudi-led coalition has been trying to restore Hadi to power and roll back Houthi gains, but violence continues almost daily.
UN MAKES NEW PROPOSAL
The coalition said Houthi fighters, backed by troops loyal to former president and GPC chief Ali Abdullah Saleh, tried to breach the Saudi border at the Rabou'a area on Saturday, igniting heavy fighting.
It said in a statement that dozens of Houthi fighters were killed near the border strip and their military vehicles destroyed by coalition aircraft that repelled their assault.
One Saudi officer and six soldiers died in the fighting, the statement, carried by Saudi state news agency SPA said.
Peace prospects dimmed on Thursday when the Houthis and GPC said they had set up a body to unilaterally run Yemen. The move was criticised by Cheikh Ahmed as a breach of U.N. Security Council Resolution 2216, which urges the Houthis to refrain from unilateral acts that could erode Yemen's political transition.
In apparent protest at the Houthi-GPC move, Hadi's delegates to the talks said they planned to pull out of the negotiations.
But Cheikh Ahmed proposed to both sides on Saturday that the Houthis quit the capital Sanaa and Hodeidah and Taiz cities, and talks subsequently be convened on forming a new government that would include the Houthis, delegates at the Kuwait talks said.
While Hadi accepted the proposal, the Houthis dismissed the proposal as a non-starter but said they would stay in Kuwait for the talks. "We have asserted to Ould Cheikh (Ahmed) that the solution must be comprehensive and that no subject is delayed," the Houthi delegation said in a statement.
(Reporting by Mohammed Ghobari and Ali Abdelatti in Cairo, Writing by William Maclean and Sami Aboudi; Editing by Kim Coghill)
Our Standards: The Thomson Reuters Trust Principles.