After two years of royal-appointed prime ministers, pro-democracy protests and a rising Maoist insurgency, King Gyanendra announced he was giving Sher Bahadur Deuba, the last elected premier, his job back.

A palace statement stopped short of saying Gyanendra regretted sacking the democratic government but said Deuba would be "invested with executive rights." Royal-appointed premiers could only take decisions with the king's approval.

"My demand for reinstatement has been fulfilled," Deuba told reporters.

"I am going to arrange for general elections with the cooperation of all political parties and will resume talks with the Maoists to maintain peace and security," Deuba said.

The royalist government had also called for renewed dialogue with the rebels, but to little avail. Opposition parties have demanded that elections, which the king wants by April, be held under a "neutral" government.

Analysts saw the reappointment as a way for Gyanendra to save face and at the same time end massive street protests which were increasingly critical of the monarchy as an institution.

The demonstrations triggered the resignation on May 7 of the king's handpicked prime minister Surya Bahadur Thapa.

"The reappointment of Deuba shows the king wants to end the street protests and restart talks with the Maoists but without having to go down before the people and say he was wrong," political analyst Kapil Shrestha said.

Maoist rebels, who are fighting to end the monarchy and control much of the countryside, have exploited the power vacuum in Kathmandu to show their strength.

Most traffic was off the streets of Kathmandu yesterday in a transport shutdown called by the rebels in a prelude to a three-day nationwide strike called by the guerrillas from June 10.

Gyanendra in October 2002 had declared Deuba "incompetent" at developing Nepal's fragile economy and at fighting the Maoist insurgency, which has claimed more than 9,500 lives since 1996.