An opposition spokesman swiftly rejected the proposal, and called for anti-government rallies to continue.
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Yemen, a neighbor of oil giant Saudi Arabia and the poorest country on the Arabian Peninsula, has been rocked by weeks of demonstrations against Saleh's autocratic administration.
"Firstly we will form a new constitution based on the separation of powers. A referendum on this new constitution will be held before the end of this year," he said.
"I'm already sure that this initiative won't be accepted by the opposition, but in order to do the right thing, I am offering this to the people and they will decide," he added.
An opposition spokesman said the proposals did not meet the protesters' demands.
"This initiative is too late. The demands on the street go beyond that and are bigger than that," said the spokesman, Mohammed Qahtan.
Saleh has governed Yemen for 32 years, but his rule has come under severe threat by nationwide demonstrations that have left almost 30 people dead.
The president has already made a number of concessions to his opponents, but has refused to bow to their central demand that he relinquish power immediately, saying he wanted to see out his term which expires in 2013.
| More about: | Saudi Arabia, Israel, Ali Abdullah Saleh, Yemen |
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