Shooting began as troops had tried to disperse a rally in the town of Ataq, in Shabwa province, witnesses said.
The protesters wanted the restoration of the former republic South Yemen, which was independent until 1990.
There have been other similar clashes in the south in recent months, fuelling concern about the country’s stability.
Yemen, an impoverished country of 23 million, also faces an intensifying conflict in the north between government forces and Houthi rebels, which has drawn in neighbouring Saudi Arabia and displaced thousands of people.
Wednesday’s demonstration in Ataq, 500km (310 miles) south-east of the capital Sanaa, happened five days before the 42nd anniversary of the British withdrawal from Aden, which gave independence to South Yemen.
Many of the protesters reportedly carried the flag of the former Marxist republic, highlighting their opposition to the central government.
Nasser Huwaider, a member of the secessionist Southern Movement, said the security forces had opened fire on the 1,000-strong crowd first.
“They surrounded us from every side and started shooting,” he told the Associated Press news agency, adding that many protesters had later been arrested.
Violence in the south broke out after an opposition rally in April marking the 1994 civil war, in which an attempt by the south to secede was quashed by the government of President Ali Abdullah Saleh, who had led the north to unification with the south.
People in the south, home to most of Yemen’s oil facilities, have long complained the central government takes advantage of their resources but marginalises and discriminates against them.