"We have decided to announce a ceasefire and remove the terrorist tag" from the Maoists, Oli told reporters after the first cabinet meeting of the new government.

The Maoists began their "people's war" in 1996 to overthrow the monarchy and establish a republic. At least 12,500 people have died.

The Maoists last week declared a three-month ceasefire after King Gyanendra backed down following weeks of public protests against his absolute rule and recalled parliament for the first time since 2002.

The government's last ceasefire started in January 2003 but only held for a few months before hostilities resumed.

Constant battles between the rural-based Maoists and the security forces have resulted in a stalemate.

Analysts say the Maoists do not have the ability to take the government's urban centres while the under-equipped army cannot defeat them in their often mountainous rural strongholds.

But an alliance between political parties and their former foes the Maoists, to tackle the king's total rule, saw the two sides move closer than they have for years.

For the first time both sides formed an unlikely alliance to demand a new body to rewrite the constitution and drastically limit the monarch's sweeping powers.

Oli said Wednesday no limit had been set on the ceasefire.

"After the declaration of ceasefire, both sides will follow the basic rules of ceasefire," he said without giving details.

An army official said shortly after the announcement that they had not been informed but took their orders from the government.

"It's up to higher authorities to tell us. We take orders from the ministry of defence," said the official, on condition of anonymity.

Rebel chief Prachanda ruled out disarming his forces and launched a scathing attack on the new political leadership, in comments seen earlier Wednesday on the Maoists' website.