Iran has accused Saudi Arabia of deliberately bombing its embassy in the Yemen capital Sana'a, injuring several members of staff. State media said planes had deliberately targeted the building in airstrikes on Thursday.
However, according to an AP reporter on the site, there was no sign of damage to the embassy, the BBC reports. A Saudi spokesman said the claims would be investigated.
Yemen has been the site of a proxy war between the largely Sunni Saudi Arabia and mostly Shia Iran for the best part of a year, says Simon Mabon in The Independent.
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Shia Houthi separatists – thought to be supported by Iran - drove the country's Sunni President Abdrabbuh Mansour Hadi into exile, while the Saudis are the prime movers behind a bombing campaign against the rebels by several Gulf states.
The enmity goes much further back, however, and relations have been "tense" since the Islamic Republic of Iran was established in 1979, says Mabon. The two nations were already geopolitical rivals but the revolution added a religious bent.
Sunni governments around the Gulf fear Iran could mobilise Shias across the region, Mabon adds, with their own Shia minority populations "often viewed as 'fifth columns'".
On Saturday, Saudi Arabia executed prominent cleric Sheikh Nimr al-Nimr, a spiritual figurehead for Shias across the region.
In response, a mob set fire to the Saudi embassy in Tehran. The Saudis then ended diplomatic relations with Iran, expelling their diplomats.
Iran vs Saudi Arabia: threat of economic war looms
As Iran and Saudi Arabi step up the diplomatic feud that followed the execution of Shia cleric Sheikh al-Nimr, and 46 others, fears are growing that the bellicose rhetoric will lead to economic or military action that could draw in other regional and international powers.
Deteriorating relations between Saudi Arabia and Iran "could easily evolve into an economic war", says the Wall Street Journal.
The Saudis already had long-term financial concerns, with oil prices at record lows. Revenue is down and the Kingdom is running a massive deficit while cutting back on government subsidies, destabilising the monarchy's hold over the population.
In Iran, US sanctions on oil exports have crippled the economy over the past five years. But Tehran hopes its newly ratified nuclear deal with world powers will bring an end to sanctions and give the country a massive injection of oil revenue. Fears of Iranian resurgence made Saudi Arabia hostile to the nuclear accord, and it is now feared that the kingdom could choose to deploy its hundreds of billions of dollars in overseas holdings to sabotage its rival's economic recovery.
"The Saudis have significant influence at foreign banks and with foreign investors and could threaten to pull funds from entities doing business with Iran," says the Wall Street Journal.
Regional rivals take sides
Saudi Arabia's regional allies have responded to the strife by stepping up diplomatic pressure on Iran. Prompted by the attack on the Saudi embassy on Saturday, Bahrain, UAE, Sudan and last night Kuwait have either broken or downgraded relations with Tehran.
Bahrain, which frequently accuses Iran of stoking unrest among its majority Shia population, has been particularly critical and announced it is closing its embassy and ordering all Iranian diplomats to leave the country within 48 hours.
Could the war of words turn violent?
"Iran has an incentive to escalate the conflict," says the Globe and Mail, as doing so will drive oil prices higher while playing to the mood of its domestic audience. Iran's Revolutionary Guard has vowed swift and harsh revenge for the execution of Shia cleric Nimr al-Nimr by the largely Sunni Saudis, promising to bring down the Saudi Royal dynasty. There are fears that Tehran could chose to take a more active role in Saudi domestic politics by stirring up trouble in the Shia-majority oil-rich province of Hasa.
"Mass executions will likely trigger a bloody civil war that won't end until the Saudi monarchy ceases to exist," Ali al-Ahmed, director of the Institute for Gulf Affairs in Washington, warned in an article last month.
The risk for Saudi Arabia is that the execution of Sheikh Nimr "ignites a long-simmering revolt by an aggrieved Shia minority who sit on top of the giant Saudi oil fields" says the Daily Telegraph.
Already there have been mass protests in the city of Qatif and, with most of Saudi Arabia's oil passing through the Shia heartland, there is the potential for disruption that could bring the world economy to its knees.
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