previously allied forces.
The embattled Yemen government is based in Aden and has struggled to build up a national military and pay its bills, including to fighters who have fought on its behalf, as Al Qaeda and Islamic State militants have taken advantage of 10 months of civil war to expand their presence in the city.
A local official said the attackers, affiliated with a local militia called the Popular Southern Resistance, sought an audience with top officials inside the palace over unpaid medical bills for guards wounded in an attack there last month.
Six guards were killed and several were wounded in the attack on Jan. 28 at the Maashiq palace in the crater district, for which Yemen's branch of Islamic State claimed responsibility.
"They wanted to discuss compensation for those killed and paying the medical bills for the wounded ... When the guards blocked them, a gun battle erupted involving light and medium weapons," the official said.
Residents in the area reported several casualties in the fighting but could not give precise figures.
A series of attacks by militants have for months rocked the city, where the Saudi-backed President Abd-Rabbu Mansour Hadi and his government are trying to oversee a campaign to dislodge Iran-allied Houthis from the northern half of the country they seized in 2014.
In a separate incident on Sunday, residents said that unidentified gunmen fatally shot a prominent Muslim cleric, Abdulrahman Mara'i al-Adeni, while heading for afternoon prayers in an Aden mosque.
(Reporting By Mohammed Mukhashaf and Noah Browning; Editing by Sami Aboudi and David Goodman)