Fierce clashes erupted between the military camp stationing in downtown Al-Habilain in Lahj Province and gunmen in which light and medium weapons were used.
Al-Habilain turned into a ghost town after its people and shoppers left it and its usually crowded markets amid fears they could be innocent victims of the clashes.
There were no reports of casualties from the one-hour fighting, but some houses were said to have suffered slight damages, local sources said.
The fighting started after soldiers arrested a separatist activist, Muhsen Al-Suhaibi, 43, from Yafi'a, the sources said, adding that the arrest took place while on his way back after he drove his kids to school.
The arrest triggered the influx of gunmen who imposed a siege around the military camp in eastern Al-Habilain.
The gunmen also took two soldiers hostage from the camp who were off duty and in civil uniform. They watched the soldiers until they arrived at the market, arrested them and took them to an unidentified place.
Sources close to the activist said the gunmen gave a 24-hour deadline to release him and his car.
The authorities should stop annoying and provoking civilians, if not the lives of the soldiers will be in danger, the gunmen said, according to the sources.
Fighter jets flew over the town amid the siege, but there were no reports of strikes.