By Mohamed Sudam and Mohammed Ghobari

  SANAA (Reuters) - Yemen's opposition rejected on Monday a Gulf Arab initiative for President Ali Abdullah Saleh to step down, because it appears to offer him immunity from prosecution, while Saleh himself welcomed the plan.

  Gulf Arab foreign ministers meeting in Riyadh late on Sunday said publicly for the first time that the framework of their mediation effort involved Saleh standing down, though it did not say when that would occur.

  The ministers called for a meeting of parties to the Yemeni conflict in Saudi Arabia but set no date.

  " Who would be a fool to offer guarantees to a regime that kills peaceful protesters? Our principal demand is that Saleh leaves first," opposition spokesman Mohammed al-Sabry said, referring to assurances that Saleh and his sons would not face the fate of rulers in Tunisia and Egypt.

  Tens of thousands filled the streets of Sanaa, Taiz, Hudaida, Ibb and the southeastern province of Hadramaut on Monday to protest against the GCC plan, witnesses said.

  Diplomatic sources say Saleh has dragged his heels for weeks over U.S. attempts to get him to agree to step down and end protests crippling the country since early February, manoeuvring to win guarantees that he and his sons do not face prosecution.

  With more than 100 protesters killed as security forces try to break up demonstrations with tear gas and live fire, activists have said they want to see legal action against Saleh and his sons, who occupy key security and political posts.

  POWER TRANSFER

  General Ali Mohsen, a kinsman of Saleh whose units are protecting protesters in Sanaa, said on Monday he welcomed the details of the GCC plan announced in Riyadh.

  " He hopes all parties will accept this initiative and not miss this opportunity," a statement from his office said.

  Shortly after the opposition rejected the Gulf initiative, Saleh's office issued a statement saying he accepted it.

  " The presidency welcomes the efforts of our brothers in the Gulf Cooperation Council to solve the current crisis in Yemen," the statement said from his office said.

  " He (Saleh) has no reservations about transferring power peacefully within the framework of the constitution," it added, in language Saleh has used before to argue he should oversee a transition involving new elections.

  Long regarded by the West as a vital ally against al Qaeda militants, Saleh has warned of civil war and the break-up of Yemen if he is forced to leave power before organising parliamentary and presidential polls over the next year.

  He had sought Saudi mediation for some weeks, but Gulf diplomatic sources said Riyadh was prompted in the end by concern over the deteriorating security in its southern neighbour after Saleh failed to act on the backroom deal struck with U.S. officials on a quick exit.

  Saudi Arabia, the world's biggest oil exporter, is the key financier of the Yemeni government as well as many Yemeni tribes on its border.

  Countries of the region became convinced that Saleh, a shrewd political operator in power since 1978, is an obstacle to stability in a country that overlooks a shipping lane where over 3 million barrels of oil pass daily.

  GULF ARABS SAY SALEH SHOULD GO

  The GCC statement on Sunday talked of " the formation of a national unity government under the leadership of the opposition which has the right to form committees ... to draw up a constitution and hold elections."

  It said Saleh should hand his authorities over to his vice president and that all parties should " stop all forms of revenge .. and (legal) pursuance, through guarantees offered" -- wording that appeared to offer Saleh assurances of no prosecution for him or his family once he leaves office.

  Saleh's deputy, Abd-Rabbu Mansour Hadi, has said he is not interested, which could open the way to the perennial survivor nominating an interim successor of his own choice.

  Even before the protests, Saleh was struggling to quell a separatist rebellion in the south and a Shi'ite Muslim insurgency in the north -- violence that has given the Arabian Peninsula branch of al Qaeda more room to operate.

  In continued unrest, two soldiers and a militant were killed in a clash between militants and the army in Lowdar in the restive Abyan province of south Yemen, which is seen as a hotbed of al Qaeda activity.

  (Additional reporting by Mohammed Mukhashaf and Erika Solomon Writing by Andrew Hammond Editing by Nick Macfie and Paul Taylor)

By Lesley Wroughton

  WASHINGTON (Reuters) - Soaring oil prices and inflation in the emerging economies that were a welcome source of stability during the financial crisis pose dangerous new risks to the world economy, the International Monetary Fund said on Monday.

  The global lender's latest assessment of global economic prospects marked a departure from recent years when its focus was on the potential peril from a near-financial meltdown and recession in advanced countries.

  The fastest growth in recent years has come from emerging markets like China, Brazil and India, which helped offset the deep downturns in the United States and other rich nations touched off by burst housing bubbles.

  Now, the IMF warns those very economies risk asset bubbles akin to the ones that sparked the 2007-2009 financial crisis.

  " The challenge for many emerging and some developing economies is to ensure that present boom-like conditions do not develop into overheating over the coming year," the IMF said in its World Economic Outlook report.

  The IMF highlighted the searing impact that rising food and commodity prices posed to poorer countries.

  Soaring costs for basic stapes stoked the social and economic tensions that have roiled the Arab world. Street protests have toppled dictatorships in Egypt and Tunisia, and left leaders in Yemen and Libya fighting to cling to power.

  The fund said inflation pressures were likely to build in developing countries as people pushed for higher wages in the face of pricier food and fuel.

  Somewhat surprisingly, the IMF said it saw little lasting impact from the triple disaster -- earthquake, tsunami and nuclear crisis -- that struck Japan last month. It revised down its 2011 forecast for growth in the world's third-largest economy only slightly and raise its projection for 2012.

  Speaking of advanced economies collectively, the IMF said a slow-paced recovery was continuing and that risks of a " double-dip" recession had decreased. But it said unemployment remained stubbornly high and not enough action was being taken to ratchet down budget deficits in the United States and elsewhere.

  RECOVERY PICKING UP

  The IMF maintained its forecasts for global growth for both 2011 and 2012 at 4.4 percent and 4.5 percent, respectively, saying the global recovery was strengthening even though downside risks have risen.

  The fastest growth was still coming from emerging economies, it said. China was expected to lead the way with growth of 9.6 percent this year, followed by India's economy, which was projected to expand 8.2 percent.

  By contrast, the United States was forecast to grow at a sub-par 2.8 percent rate this year and 2.9 percent in 2012. The IMF expressed concerns that U.S. plans to cut its budget deficit were backsliding and it urged Washington to tackle politically thorny Social Security and tax reforms.

  In Europe, the IMF said the recovery was gaining traction despite financial turbulence in Greece, Ireland and Portugal, which have sought IMF and European Union rescue loans to stabilize their financial systems.

  The IMF revised up its outlook for the euro zone to 1.6 percent this year and 1.8 percent in 2012.

  " The outlook is for a continued gradual and uneven expansion in Europe," the IMF said.

  The fund said many old policy challenges remained unaddressed even as new ones appear on the horizon.

  In advanced economies, strengthening the recovery underway will require keeping monetary policy accommodative as long as wage pressures are subdued, inflation expectations are kept under control, and bank credit is sluggish.

  The European Central Bank last week raised interest rates in the first of what is expected to be a series of moves. In contrast, the United Kingdom has held rates steady and the U.S. Federal Reserve is expected to keep its easy policies in place through this year.

  In emerging economies, the IMF said, it would be a mistake for policymakers to delay additional policy tightening until rich nations start to raise rates.

  " The task facing policymakers is to convince their national constituencies that these policy responses are in their best interest regardless of the actions others are taking," the IMF added.

  Emerging economies have accused the United States and other advanced economies for causing the surge in potentially destabilizing capital flows with their easy monetary policies. Some, like Brazil, have introduced capital controls to manage the flow of investment money.

KIEV (Reuters) - Ukraine's state prosecutor's office has launched a criminal case against former prime minister Yulia Tymoshenko over a gas deal she reached with Russia in 2009, a senior prosecutor said on Monday.

  Tymoshenko, who stepped down as prime minister after losing the February 2010 presidential election to Viktor Yanukovich, has already been targeted by two separate criminal probes related to alleged misuse of state funds, charges she denies.

  " A criminal case has been launched against the former prime minister over abuse of power linked to the signing of gas contracts in 2009," First Deputy Prosecutor General Renat Kuzmin told reporters.

  He was referring to a January 2009 deal between Tymoshenko and Russian Prime Minister Vladimir Putin on Russian gas supplies, which are crucial for Ukraine's energy-hungry economy.

  The agreement ended a stand-off that had briefly disrupted Russian gas flows to Europe. It tied the price of gas from Russia's Gazprom to spot oil prices. As a result, Ukraine's gas bill has since been steadily rising.

  Yanukovich's government has urged Russia to review the pricing formula but talks have not been successful so far.

  Tymoshenko, who accused the Yanukovich camp of election fraud in 2010, remains his main political rival, though she has failed to marshal other opposition parties behind her.

  She says that the criminal cases opened against her are politically motivated and that she and her allies, some of whom have been arrested, are being victimised by Yanukovich.

  (Reporting by Pavel Polityuk Writing by Olzhas Auyezov Editing by Richard Balmforth and Mark Trevelyan)

TRIPOLI (Reuters) - An African Union official said Monday the issue of Libyan leader Muammar Gaddafi's stepping down had been discussed during peace talks in Tripoli.

  " There was some discussion on this but I cannot report on this. It has to remain confidential," said Ramtane Lamamra, AU Commissioner for Peace and Security. " It's up to the Libyan people to chose their leaders democratically."

  He added the peace road map included an immediate cease-fire, promotion of national dialogue, protection of foreign nationals in Libya and extension of humanitarian assistance.

  (Reporting by Maria Golovnina editing by Philippa Fletcher)

* Bigger budget fights ahead

  * Deal brings record $38 billion in spending cuts (Updates with visit to Lincoln Memorial, quotes)

  By Patricia Zengerle and Jeff Mason

  WASHINGTON, April 9 (Reuters) - President Barack Obama signed a short-term spending bill on Saturday that averted a government shutdown, formalizing a compromise deal with Republicans that paves the way for more -- and bigger -- deficit-reduction fights to come.

  With just over an hour to spare before a midnight deadline, Obama's Democrats and opposition Republicans agreed on Friday to a budget compromise that will cut about $38 billion in spending for the last six months of this fiscal year.

  After signing the stopgap spending bill to keep the federal government running until the deal can be formally approved in the coming days, Obama underscored the fact that Washington was open with a surprise visit to the Lincoln Memorial.

  " I just wanted to say ... that because Congress was able to settle its difference, that's why this place is open today and everybody's able to enjoy their visit," he told cheering tourists from the monument steps.

  Friday night's agreement -- after a furious battle over spending and social issues like abortion rights -- averted a shutdown that would have weakened the U.S. economic recovery, forced furloughs for some 800,000 federal employees, delayed paychecks for troops in Afghanistan and Iraq, and closed national parks and monuments.

  Obama said the pact involved painful compromises. " I would not have made these cuts in better circumstances. But we also prevented this important debate from being overtaken by politics and unrelated disagreements on social issues," he said in his weekly radio address.

  DEFICIT WOES

  The deal angered some Democrats, who said it unfairly punished working-class Americans as they deal with the lingering effects of a steep economic recession, after Obama agreed to a deal in December that cut taxes for the rich.

  " These things are bad. I think it's also bad for the American economy," Representative Eliot Engel said on MSNBC.

  Republicans lost no time in stressing the deal did not mean they were ready to compromise as the government grapples with a deficit expected to hit $1.4 trillion this year.

  " Washington has not been telling you the truth about the magnitude of the problems we are facing," Representative Paul Ryan, who has announced a budget plan to save $6 trillion over the next decade, partly by cutting government-run health programs for the poor and elderly, said in the Republicans' Saturday radio address.

  The White House made clear it was looking ahead to the next funding fights. Senior administration officials told reporters the deal was a sign the parties could work together on issues like increasing the debt ceiling and cutting the deficit.

  " (There's a) very important message tonight to the American people and hope for the future that our leaders can come together and ... produce what is the biggest annual spending cut in the history of the country," one said.

  The government could hit the current $14.3 trillion limit on its borrowing authority by mid-May and will need Congress to approve another increase in that debt ceiling.

  Congress must also approve a budget for the next fiscal year, a fight likely to last well into the 2012 campaign season as Obama seeks a second term.

  PUBLIC FRUSTRATION, AMBIVALENCE ON CUTS

  Tourists strolling through Washington said they were relieved the government had not closed.

  " We would not have gone in to check out the Smithsonian museum before coming over here to see the cherry blossoms if everything was closed," said Greg Kohler, 32, of Harrisburg, Pennsylvania, as he walked with his wife and baby under the capital's famed cherry blossom trees.

  But Kathy Nelson, 59, a visitor from Huntsville, Alabama, walking near the White House, said a shutdown would have been a needed wake-up call for the country to deal with its debt.

  Americans have notoriously mixed feelings about deficits -- they want low taxes, but resist talk of cuts in government healthcare and Social Security pension programs.

  As Democrats and Republicans traded blame and a shutdown loomed, the biggest incentive for a deal might have been the risks that failure would have posed for Obama and other politicians of both parties just as the 2012 presidential election campaign gathers steam.

  The spending cut was a victory for Republicans who won control of the House of Representatives in November on promises to scale back government. House Speaker John Boehner came under intense pressure from Tea Party movement conservatives inside his party to take an even tougher stance.

  Obama and the Democrats were able to beat back a Republican effort to block birth control funding to Planned Parenthood, because the family planning organization also provides abortions -- although not with public money.

  The deal did include language banning the use of federal government funds for abortions in Washington, the capital city that comes largely under Congress' jurisdiction. (Additional reporting by Emily Stephenson and Margaret Chadbourn Editing by Vicki Allen and Peter Cooney)