Saudi Arabia to grant Yemen $1.2 billion in economic aid - Saudi source

By Aziz El Yaakoubi and Mohammed Alghobari

RIYADH (Reuters) - Saudi Arabia is giving Yemen's presidential council $1.2 billion to help the country's struggling economy, a Saudi source told Reuters on Tuesday.

Fighting with the Iran-aligned Houthis in north Yemen has largely stopped over the last year but the Saudi-backed government, based in Aden, has grappled with a weak currency and high prices.

The situation has particularly worsened in Aden and south Yemen since several Houthi drone attacks targeted oil tankers in southern oil terminals, stopping the government exporting crude oil from there.

The support will contribute to strengthening security and preventing a return of military clashes, the Saudi source said.

It would also encourage dialogue on all sides to reach a comprehensive political solution to the Yemeni crisis, the source added.

A Yemeni official said the donation would be used to pay government wages, fuel for power plants and food imports.

Yemen's war is seen as one of several proxy battles between Iran and Saudi Arabia, which agreed to re-establish ties earlier this year.

The Houthis, aligned with Iran, ousted the Saudi-backed government from Sanaa in late 2014, and have de facto control of north Yemen. They say they are rising up against a corrupt system and foreign aggression.

They have been fighting against a Saudi-led military alliance since 2015 in a conflict that has killed tens of thousands and left 80% of Yemen's population dependent on humanitarian aid.

In April, Saudi and Omani officials held peace talks with the Houthis as Riyadh seeks a permanent ceasefire to end its military involvement in the country's long-running war.

The talks stalled over a mechanism to pay wages for public servants from oil revenues, rebuilding efforts, and a timeline for foreign forces to exit the country.

Both sides said further discussions would be held to iron out remaining differences.

(Reporting by Aziz El Yaakoubi; editing by Christina Fincher and Alex Richardson)