Local militiamen in the southern Yemeni city of Aden said they captured two Iranian military officers advising Houthi rebels, during fighting on Friday evening.
Tehran has strongly denied providing any military support for Houthi fighters, whose advances have drawn Saudi-led air strikes in a campaign dubbed "Decisive Storm."
If confirmed, the presence of two Iranian officers, whom the local militiamen said were from an elite unit of Iran's Revolutionary Guards, would deepen tensions between Tehran and Riyadh, who are vying for influence in the Middle East.
Three sources in the city's anti-Houthi local militias said the Iranians, identified as a colonel and a captain, were seized in two different districts rocked by heavy gun battles.
"The initial investigation revealed that they are from the Quds Force and are working as advisors to the Houthi militia," one of the militia sources told Reuters.
"They have been put in a safe place and we will turn them over to Decisive Storm to deal with them," the source added.
Heavy Saudi-led air strikes and ground combat between armed factions battered southern Yemen on Saturday, killing around 20 Houthi fighters and two rival militiamen, residents and militiamen said.
The war threatens to turn Yemen into a failed state and spread sectarian strife in the Middle East.
Bolstered by more than two weeks of air raids led by Sunni Muslim Saudi Arabia, local armed groups have been resisting the southward advance of the northern-based Shi'ite Muslim Houthis.
The Christian Science Monitor reports that plans to retake Aden from the Houthis is taking shape in Riyadh.
Over the last two weeks, the UN-backed Yemeni President Abed Rabbo Mansour Hadi has been working feverously to patch together a broad coalition of Yemeni tribes backed by Arab military intervention against the Iranian-allied Houthis.
The result is a tribal coalition of some 70,000 fighters – and the pledge of a Saudi-Egyptian expeditionary force. Yemeni officials say they are preparing to retake the southern port city of Aden “within days,” and thence fight for control over the rest of Yemen.
“From day one, we have been building a coalition across all segments of Yemeni society to return the rule of law,” says Yasseen Makawi, a close aide to Hadi who has led several talks here with Yemeni tribal leaders. Hadi is currently in Riyadh, living under tight security.
Residents said southern fighters ambushed a convoy of Houthis and allied forces loyal to ex-president Ali Abdullah Saleh in a tribal area about 100 km (60 miles) north of their base in Aden, killing 15 of the northerners.
Inside the major port city, clashes erupted between Houthi forces and local militiamen firing rocket-propelled grenades and machine guns. Five Houthis and two local militiamen died, residents said.
While the Houthis deny getting help from Shi'ite Iran and say their armed campaign is designed to stamp out corruption and Sunni al Qaeda militants, Saudi Arabia and its allies describe them as an Iranian-backed threat to regional security.
The United Nations says the conflict, in which the Houthis seized the capital Sanaa in northern Yemen in September, has killed 600 people, wounded 2,200 and displaced 100,000 others.
(Reporting by Mohammed Mukhashaf; Writing by Noah Browning; Editing by Michael Georgy/Mark Heinrich/Susan Fenton)