By Alistair Lyon, Special Correspondent

SANAA, Feb 25 (Reuters) - Foreigners wander freely among the handsome stone and baked-brick houses of Sanaa's Old City, but elsewhere in Yemen al Qaeda attacks have damaged a fledgling tourism industry already hurt by tribal kidnappings.

The government, which hopes tourism earnings can help offset flagging oil revenues, is struggling to shore up security by providing armed police escorts for travel to certain areas. It even plans a satellite system to track tourist vehicles.

Tourism Minister Nabil Hasan al-Faqih said the system should be working within two months. "This will help the tourism police and (local) governors," he told Reuters in an interview.

Yemen can ill afford any more shocks like last month's killing of two Belgian tourists and two Yemenis by gunmen in Hadramout, a southern province previously thought safe.

That shooting occurred only six months after a suicide car bomb killed eight Spanish tourists and two Yemenis in the troubled Marib region, 100 km (60 miles) east of Sanaa.

Yemen earned $424 million from 379,000 visitors last year, but Faqih said a 15 percent growth target set for 2008 would have to be lowered after the Hadramout killings.

Insecurity is bad news for the tourism sector and chances of foreign investment in the Middle East's poorest country, where infrastructure is ramshackle and quality hotels are few.

Yemen, where Osama bin Laden's family originated, is viewed in the West as a haven for militants and a "pipeline" for those bent on fighting U.S.-led forces in Iraq and Afghanistan.

President Ali Abdullah Saleh joined Washington's "war on terrorism" after the Sept. 11 attacks on U.S. cities, but his government has steered an ambivalent course since Yemeni mujahideen began returning from Afghanistan in the 1990s.

Many were recruited into the army and a Yemeni analyst, who asked not to be named, said they had yet to be purged. The authorities had effectively offered to tolerate the militants as long as they caused no trouble in Yemen, he added.

The government has also used Muslim scholars to "re-educate" militants, but some of those freed after renouncing violence then went to Iraq or renewed their activities in Yemen.

NEW QAEDA GENERATION

"Now there is a third al Qaeda generation with no links to Afghanistan," said a European diplomat. "These youngsters lack respect for the ("Afghan") mujahideen because of the deals they did with the government -- and they oppose the West."

Apart from striking at tourists, Al Qaeda has targeted oil installations that produce about 300,000 barrels per day, two thirds of which is exported, generating most of Yemen's revenue.

Oil Minister Khaled Mahfoudh Bahah said such "external" attacks were a greater threat than that posed by tribesmen who sometimes kidnap tourists or expatriates to press for better schools, roads and services or for the release of prisoners.

"When it comes to the tribal people looking for water or schools, it doesn't disturb me. I know their demands and I can deal with them," he told Reuters.

"But when it comes to external factors, that really worries us. It is not only for Yemen, it has become a phenomenon worldwide, which is terrorism in general," he added.

The Yemeni government says it is committed to combating al Qaeda, but the United States is unhappy about incidents such as the escape from a Sanaa prison two years ago of 23 militants, including several it says were affiliated to al Qaeda.

It wants to take over custody from the Yemeni authorities of one militant, Jamal al-Badawi, who has broken out of jail twice since he was convicted of masterminding the suicide attack on the U.S. warship Cole in 2000, which killed 17 U.S. sailors.

Yemen foiled two suicide attacks on oil and gas facilities in 2006, days after al Qaeda urged Muslims to target Western interests. The network's wing in Yemen claimed responsibility.

After the shooting of Belgian tourists last month, several Western countries tightened their travel warnings -- moves that the Sanaa government says only serve the goal of terrorists.

"If they say, 'don't go to Yemen, it's not safe', the terrorists get what they need," Faqih, the tourism minister, said. "What happened in Yemen can happen anywhere in the world."

Despite the risks, some tourists still come, lured by Yemen's rich traditional architecture, stunning mountains and unspoiled beaches, but Faqih acknowledged that many Yemenis had yet to appreciate the economic value of tourism.

"We have the culture, the heritage, the environment and the people to become one of the most important destinations," he said. "The weak point is the mentality of the people.

"Once the people touch the benefits of tourism, they will work together with us against any terrorist attack," Faqih said.

(Editing by Samia Nakhoul)

AlertNet news is provided by