By Yara Bayoumy and Mohammed Ghobari

SANAA (Reuters) - Yemen's powerful Houthi movement fought artillery battles with the army near the presidential palace in Sanaa on Monday, surrounded the prime minister's residence and drew accusations they were mounting a coup.

Explosions echoed across the city and smoke hung over downtown buildings as the most intense clashes since the Shi'ite Muslim Houthi movement seized the capital in September, throwing the fragile Arab state deep into turmoil.

In the evening, the government said a palace in central Sanaa where the prime minister lives had been encircled by Houthi forces and that Houti representatives were talking with the president.

"Houthis in meeting with president to agree on terms for releasing chief of staff in return for changes in constitution and national authority," Information Minister Nadia al-Saqqaf said on her Twitter account.

The Houthis' September takeover made them the country's de facto top power, and tensions between them and President Abd-Rabbu Mansour Hadi had been growing since Saturday when they abducted his chief of staff, Ahmed Awad bin Mubarak, to gain leverage in a bitter dispute over a proposed new constitution.

Earlier on Monday, Saqqaf said Houthi fighters had fired on Prime Minister Khaled Bahah's motorcade after he left a meeting with Hadi and a Houthi adviser that had been called to try to resolve bitter disagreements over a draft constitution.

A Yemeni government spokesman described the shooting at Bahah's armoured convoy as an assassination attempt. Bahah's residence, the Republican palace, was later cut off.

"The gunmen have surrounded the palace and the prime minister is inside," government spokesman Rajeh Badi said. Two eyewitnesses confirmed the siege.

Al-Saqqaf earlier told Reuters the presidential palace had come under "direct attack" in what she described as an attempted coup. Hadi was believed to have been at home in another district at the time. "If you attack the presidential palace ... This is aggressive, of course it is an attempted coup," she said.

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Government ministers said a ceasefire had come into force in the evening after the Houtis had seized the state news agency and television station. Nine people were killed and 90 wounded, Health Minister Riyadh Yassin told state news agency SABA. Final numbers are likely to be higher.

Widely seen as Iran's ally in its regional struggle for influence with Saudi Arabia, the Houthis -- now part of Yemen's government -- said they would "escalate the situation" if their demands for a fair stake in a new constitution were not met.

Yemen has long been plagued by tribal divisions, a separatist challenge in the south and the threat from a regional wing of al Qaeda, which claimed a deadly Jan. 7 attack in Paris on a satirical journal known for mocking Islam.

GUNFIRE, EXPLOSIONS

In the early evening, state news agency Saba quoted Interior Minister Jalal al-Roweishan as saying a ceasefire had gone into effect. Residents reported that the intense artillery and gun battles of earlier in the day appeared to have tailed off.

But residents were uncertain about the immediate cause of the violence, which began in the early morning with explosions near the palace and the home of the national security chief.

Residents said army gunners had shelled a housing compound used as a Houthi base.

Heavy gunfire and explosions shook the Hadda district in the diplomatic quarter in Sanaa's south. A Reuters witness saw gunmen in Al-Khamseen street, home to some senior government security officials, including the defence minister.

"On my way to work in the morning in Hadda street, there were gunmen swarming everywhere. They were in military fatigues. Their bazookas bore 'Death to America, death to Israel' signs, which is the Houthis' sign," said a hotel worker.

In a move that stunned the Arab world, the Houtis seized Sanaa in September and advanced into central and western regions of Yemen, where Sunni Muslims predominate. The Houthis want more rights for the country's Zaydi Shi'ite sect and say they are campaigning against corruption.

PARTNERSHIP

A deal signed later that month between political parties and the Houthis called for the formation of a new unity government followed by the withdrawal of Houthi combatants from the capital. The fighters have remained in place, however.

In what he said was an attempt to defuse the violence, Saleh al-Sammad, a Houthi member appointed by Hadi as a political adviser in September, issued a statement with a list of conditions addressed to the government.

The conditions include a "fair" and inclusive partnership with Ansarallah, the political wing of the Houthi movement, and omitting sections of a draft constitution that he said violated September's political agreement.

"If the previous agreement is not honoured, there is commitment to escalate the situation ... and it is difficult to undo the escalation, which will come at a big cost," he said.

The draft, launched on Saturday, aims to resolve regional, political and sectarian differences by devolving authority to the regions, but has been opposed by the Houthis who fear it will dilute their power.

(Writing by Amena Bakr and Sami Aboudi; editing by William Maclean, Mark Heinrich, Giles Elgood and Philippa Fletcher)