Yemen's Prime Minister Ahmed bin Dagher on Wednesday rejected a unity government proposed by Iran-backed rebels whom he accused of bringing the country's economy to the brink of collapse.

At a cabinet meeting in the Saudi capital, Dagher insisted that the rebels surrender their weapons and withdraw from seized territory in line with a UN Security Council resolution adopted in April last year.

The Shiite Huthi rebels and their allies overran the capital Sanaa in September 2014 and went on to seize control of several regions, forcing President Abedrabbo Mansour Hadi to flee to Saudi Arabia.

Riyadh formed a regional coalition that began air strikes against the rebels in March last year and later sent in ground forces to support Hadi's government.

"The retreat (of the rebels) from state institutions is non-negotiable," the premier said.

The meeting was held inside a Saudi government hall where Dagher read from a statement, with cabinet ministers seated at a long table in front of him.

At UN-brokered peace talks which began on April 21 in Kuwait, the rebels made a transitional government of consensus a precondition for applying Security Council Resolution 2216.

But the prime minister attacked "those who want a national unity government before handing over the weapons" which constitutionally belong in state hands.

He added that the country was "in a terrible state of economic and monetary collapse" after the rebels spent $3 billion, almost the entire monetary reserves of Yemen, "in their war efforts".

He said the rebels also arranged to print more money, leading to a collapse in the value of the rial and a spike in prices.

Residents say the cost of fruit and vegetables has risen by at least 20 percent in recent days, while essentials like flour are up by more than 30 percent.

On Tuesday, Yemen's government threatened to quit the peace talks unless UN special envoy Ismail Ould Cheikh Ahmed can provide a written guarantee from the rebels that they recognise Resolution 2216 and the "legitimacy" of Hadi's administration.

Foreign Minister Abdulmalek al-Mikhlafi said his team will stay in Kuwait until the weekend and then take a decision.

One foreign diplomat told AFP he was "not optimistic", while raising the possibility of international pressure on the government to show greater flexibility over rebel disarmament and the transitional government proposal.

Another diplomatic source was more positive.

"I don't think we're looking at it really being over yet," although neither side had been particularly flexible, the source said.

He added that Hadi's future appears to be a factor in discussion of the proposed "consensus" government.

"My guess is that Hadi just doesn't feel that he would be part of that consensus government," the source said.

Kuwait's emir, Sheikh Sabah al-Ahmad Al-Sabah, on Wednesday called on the two sides to continue negotiating to "reach positive results".

Fighting has killed more than 6,400 people, displaced about 2.8 million and left 82 percent of Yemen's population in need of aid, the UN says.