UPDATE 1-UN Security Council warns against arms transfers to Yemen

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* U.N. says ready to consider sanctions on Yemen spoilers

* Iran denies any connection to the weapons (Adds British U.N. envoy comment)

By Michelle Nichols

UNITED NATIONS, Feb 15 (Reuters) - The U.N. Security Council warned on Friday against attempts to destabilize Yemen with weapons shipments as the country tries to rebuild after two years of upheaval and expressed concern that former president Ali Abdullah Saleh was undermining the process.

The 15-member council said it was ready to consider further measures, including sanctions, "if actions aimed at undermining the Government of National Unity and the political transition continue."

Yemen said its coast guard seized missiles and rockets on Jan. 23 believed to have been sent by Iran. Iran has denied any connection to the weapons, which were found aboard a vessel off the coast in an operation coordinated with the U.S. Navy.

The Security Council has asked its group of experts that monitors compliance with the Iran sanctions, which includes a ban on arms exports, to investigate the incident after Yemen officially complained, Britain's U.N. Ambassador Mark Lyall Grant told reporters.

"The Security Council expresses concern over reports of money and weapons being brought into Yemen from outside for the purpose of undermining the transition," the Security Council said in a statement.

The council also expressed concern over reports of interference "by individuals in Yemen representing the former regime ... including former president Ali Abdullah Saleh and former vice president Ali Salim Al-Beidh."

Under the U.S.-backed power transfer deal, President Abd-Rabbu Mansour Hadi is overseeing reforms for a two-year interim period to ensure a transition to democracy. Presidential and parliamentary elections are expected in 2014.

Saleh stepped down in February 2012 after 33 years in office as part of the power-transfer deal, but he remains influential. His continuing sway in Yemen worries Gulf neighbors and Western nations fearful that the transition could descend into chaos.

Council envoys visited Yemen last month to show support for the power transfer. Yemen is struggling with several conflicts, including an al Qaeda insurgency, a Shi'ite Muslim rebellion and separatist forces.

Iran's U.N. mission wrote to the Security Council regarding the allegations about the ship containing arms bound for Yemen to deny responsibility.

"It has been further claimed that the items seized on board ... the ship were produced in Iran," Iran's U.N. Ambassador Mohammad Khazaee wrote. "Even if some of these items were made in Iran, this does not provide any evidence that Iran was involved in the shipment of arms to Yemen."

The council has imposed four rounds of sanctions on Iran for refusing to halt its nuclear enrichment program, which the United States, European Union and their allies suspect is at the heart of a weapons program. Iran rejects the allegation and refuses to halt what it says is a peaceful energy program. (Reporting by Michelle Nichols; Editing by David Brunnstrom and Jackie Frank)

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