SANAA, May 10 (Reuters) - Yemen has recalled its ambassador in Libya over its suspected support to Shi'ite Muslim rebels, a state-run Web site said on Thursday.

Yemeni officials have said they suspected Libya was supporting the rebels led by Abdul-Malik al-Houthi, who have been fighting government forces in the northern province of Saada since the beginning of 2007.

"The decision to recall the ambassador ... came a day after popular demands for cutting Yemeni ties with Libya and to close its embassy in Sanaa over accusations of Libyan involvement in supporting the terrorist elements," the Web site of the ruling People's Congress Party said, quoting "well-informed" sources.

The Web site, almotamar.net, said that residents of Saada had urged the government to sever ties with Tripoli as part of efforts to dry up the sources of rebel funding.

The rebels deny receiving any support from Libya, which they say had only tried to mediate in the conflict. Libya, like Yemen, is dominated by Sunni Muslims.

Hundreds of people have been killed and thousands have fled their homes due to the clashes between Yazdi Shi'ite rebels and government forces.

Yemeni Foreign Minister Abubakr al-Qirbi told Reuters earlier this week that "Houthi's travels to Libya have also given the impression that Libya is involved".

Houthi's exiled brother, Yahya, in March rejected as baseless accusations that the rebels were receiving Iranian and Libyan support.

A party official has said Iranian religious institutions were backing the Yazdi Shi'ite Muslim rebels, but not Tehran.

The government accuses the rebels of seeking to oust its secular administration and install Islamist rule. The rebels say they are defending their villages against what they call government aggression.

But Qirbi told Reuters on Tuesday it was not clear what the rebels wanted.

President Ali Abdullah Saleh ordered the army in January to crack down on Houthi and his group, whom the government says preaches violence against the United States.

The conflict has raged on and off since 2004. The flare-up began when the rebels attacked government forces who set up a checkpoint deeper inside Saada.

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