Tens of thousands took to the streets to celebrate the king's climbdown late Monday after weeks of violent protests as they waved party flags and chanted "Long live democracy" and "Clear the royal palace".

Many, brandishing photographs of some of those killed during the 19 days of strikes and violent protests, massed at the home of three-time former premier Girija Prasad Koirala.

Koirala, now in his 80s, was nominated by the opposition Tuesday to be the new prime minister in the parliament when it sits in Kathmandu for the first time in four years on Friday.

But a united front against Gyanendra was shaken when Maoist rebels flatly rejected the monarch's offer to reinstate parliament and warned of new violence.

Gyanendra snatched outright rule of the Himalayan kingdom 14 months ago, accusing the government of failing to tackle a bloody 10-year insurgency that has left more than 12,500 people dead.

"It's a new ploy to break Nepalese people and save his autocratic monarchy," Maoist leader Prachanda, known as the "Fierce One", said in a statement.

The Maoist leader vowed to blockade the capital Kathmandu and other major centres.

But members of a seven-party opposition alliance said they expected the Maoists to come on board when their key demand for an elected assembly to write a new constitution was addressed by parliament. The assembly would decide on the future fate of the monarchy.

The opposition also announced plans to declare a government ceasefire against the Maoists, who were loose allies of the opposition in the pro-democracy campaign, and called on the rebels to match it.

The capital appeared to be slowly returning to normal life with shops opening, mobile telephone networks restored and no curfew was imposed for the first time in nearly a week. Dozens of political detainees were also released.

"I'm so happy but I feel a very serious responsibility," Sunil Kumar Bhandari, a political activist who spent three weeks in detention, said as he was released Tuesday garlanded in flowers.

The crowds, numbering in their tens of thousands according to AFP estimates, flooded on to the city's ring-road, the edge of a curfew zone that was the scene of some of the heaviest battles between police and protesters since April 6 in which at least 14 people died across the country.

The opposition will investigate and punish anyone responsible for human rights abuses once the interim government is up and running, a senior politician said.

But the excited crowds also headed to the centre of the city to areas ruled off-limits after the king's power grab 14 months ago.

Feelings continued to run high against the king with a heavy security presence around the royal palace. Protesters defaced the king's name on hoardings before pulling them down within a few hundred metres of the pink-hued palace.

"This feels great," said Bedram Kandel, 26, as he joined thousands in Kathmandu on a road banned from use by protesters.

"I want parliament to be established and for there to be a peaceful monarchy," he said. "But we don't want King Gyanendra -- he's corrupt."

The king made his second televised statement in four days to try to quell the protests and halt a general strike that left the capital struggling for supplies and a build-up of rubbish on roadsides.

The parliament was dissolved in May 2002 as it looked set to refuse the extension of a six-month state of emergency, which gave the king sweeping powers to tackle the Maoist insurgency.

"The king should have made this speech one week ago, but it's a good sign," said Kamal Chhetri, 32, a hotel worker. "The king has accepted the people's power."

US officials reacted warily Monday to the pledge by Nepal's king to restore parliament, saying Washington was looking for more concessions from Gyanendra.

But Nepal's two giant neighbours, China and India, both expressed satisfaction at the king's retreat.