Sana’a, AP/Asharq Al-Awsat—Shi’ite rebels holding Yemen’s president captive in his home reached a deal with the US-backed leader on Wednesday to end a violent standoff in the capital, fueling fears that a key ally in the battle against Al-Qaeda has been sidelined.

The late-night agreement, which promises the rebels greater say in running the Arab world’s poorest nation in exchange for removing its fighters from President Abd Rabbuh Mansur Hadi’s residence and key areas of the capital, left unclear who really controls the country.

In the deal, details of which were reported by the official SABA news agency, the Houthi rebels also agreed to release Hadi’s chief of staff, Ahmed Bin Mubarak, whom they had kidnapped in recent days.

The Houthis, who seized control of the capital and many state institutions in September of 2014, say they only want an equal share of power. Critics say they want to retain Hadi as president in name only, while keeping an iron grip on power.

The power vacuum has raised fears Yemen’s Al-Qaeda’s branch, Al-Qaeda in the Arabian Peninsula (AQAP), which claimed responsibility for the recent attack on a French satirical weekly and is considered by Washington to be the terror group’s most dangerous affiliate, will only grow more powerful as Yemen slides toward fragmentation and the conflict takes on an increasingly sectarian tone. The Shi’ite Houthis and the Sunni terror group are sworn enemies

After days of violent clashes and the seizure of the presidential palace, a source with knowledge of the situation told Asharq Al-Awsat that Hadi was now “under virtual house arrest” in his home and had been receiving threats daily from the group, who had removed his guards and deployed their own fighters in their place.

Soon after the agreement on Wednesday night, there was no visible change in Houthi deployment outside Hadi’s house.

The source, who requested anonymity, said that as part of the agreement the Houthis were also demanding Hadi appoint one of their members as vice president and allow 30,000 members of their fighters to be added to the country’s armed forces.

While Wednesday’s deal stopped short of asserting a Houthi takeover of government, analysts said the Shi’ite rebels had become Yemen’s de facto ruling power.

“The Houthis are in effective control,” said Jamal Khashoggi, a Saudi columnist and observer of Yemen’s affairs. “Even if Hadi agrees to stay president, he no longer controls Yemen and can’t give orders . . . The fear is the country will be dragged toward division and infighting.”

Speaking to reporters in Washington, State Department spokeswoman Jen Psaki said, “Clearly, we’ve seen a breakdown in the institutions in Yemen.” However, she added, “the legitimate Yemeni government is led by President Hadi.”

“We remain in touch with him. He is in his home,” she said, adding that Washington’s “ongoing counterterrorism cooperation with Yemen has continued” despite this week’s standoff.

In a speech late Tuesday, the Houthis’ 33-year-old leader, Abdul Malik Al-Houthi, delivered a lengthy ultimatum, warning that “all options are open” if Houthi demands aren’t met.

Wednesday’s deal bowed to a series of rebel demands, including amendment of a draft constitution and expanded Houthi representation in parliament and in state institutions, SABA said. It also included better representation for Yemen’s southerners.

The agreement also calls on Hadi to revamp a commission tasked with writing the draft constitution to ensure greater representation for the Houthis. The draft document had proposed a federation of six regions, something the Houthis reject. Wednesday’s deal provided for a federal state, but didn’t mention the six-region proposal.

But the deal leaves contentious political issues unresolved, opening the possibility of a repeat of this week’s violent standoff.

The collapse of Hadi’s powers is rooted in Yemen’s fractured armed forces, torn between Hadi and his predecessor, deposed president Ali Abdullah Saleh.

Saleh—toppled after more than three decades in power following a 2011 uprising—is accused by many of orchestrating the Houthis’ seizure of Sanaa. Critics also say the Houthis have the backing of regional Shi’ite power Iran, a charge they deny.

Capitalizing on the chaos, Saleh made a rare public statement Wednesday, calling on Hadi to call early presidential and parliamentary elections and urging the cancellation of UN Security Council sanctions imposed on him and two Houthi leaders last year after the Houthi seizure of power.

In recent days the Houthis have been using media outlets loyal to them to broadcast recordings of telephone conversations between President Hadi and chief of staff Mubarak, whom the Houthis said was in possession of the recordings on his cell phone at the time of his abduction by the group

Both Hadi and Bin Mubarak can be heard on the recordings using strong language when speaking of the southern secessionist Al-Hirak movement, which is currently demanding the reestablishment of the independent state of South Yemen.

A source close to the presidency, who requested anonymity because they are not authorized to brief the media, told Asharq Al-Awsat they believed the recordings were the results of wire-tapping of the president’s office, telephones and cell phones as well as those of numerous top aides and officials, and not stored on Bin Mubarak’s cell phone as the Houthis said.

“The kidnapping of Bin Mubarak on the same day the new constitution was due to be discussed shows that the recordings were in the Houthis’ possession from before, and that they had coordinated this whole operation,” the source said.

He said the speech given by Houthi leader Abdul Malik Al-Houthi on Tuesday evening, and which pointed to Hadi having communications with the British and the Americans, showed “without a shadow of a doubt” that there was someone from the president’s office supplying the Houthis with these recordings.

The source went on to accuse employees of the presidency loyal to Saleh of being responsible for the leaks. “Hadi’s administration is facing a major betrayal from within a number of state institutions carried out by individuals loyal to former president Ali Abdullah Saleh,” the source said.

On Tuesday evening Al-Jazeera’s Arabic-language TV channel broadcast recordings of telephone conversations which it said took place in October between Saleh and the Houthi representative at the National Dialogue Conference. Both men can be heard discussing surrounding all Yemen’s air, land and sea exits in order to stop political opponents from leaving the country. At one point during the recording Saleh accuses Hadi of ordering the military to attack a square that was occupied by members of the Houthi movement during a mass demonstration in September.

Some fear the Houthi offensive could cause a break-up of Yemen, only united in 1990. Political analyst Mansour Hayel said that the Houthis’ power grab in the capital could prompt the “fragmentation of all of Yemen,” which could become “worse than Somalia.”

The violence has also taken on a sectarian tone, much to the benefit of AQAP. Over the past months, AQAP has launched deadly suicide bombings targeting Houthi gatherings, marking a shift in their previous tactics of targeting only security forces.

However, amid the rise to power of its Shi’ite rival, AQAP has kept quiet about the consolidation of power in the hands of its opponents.

Among the Houthi rebel gains Wednesday was the capture of a key military base that houses ballistic missiles outside Sana’a. Soldiers guarding the base offered no resistance, said military officials, speaking on condition of anonymity as they weren’t authorized to talk to journalists.

Arafat Madabish contributed additional reporting from Sana’a.