Protesters stormed inside the city's main mosque and lit a fire, but were driven out by police. Others burst into the offices of Saudi Arabian Airlines and Qatar Airways, smashing windows and taking papers and furniture into the street to burn.

Earlier, police had lobbed teargas shells at about 3,000 demonstrators burning tyres at a main intersection 200 metres (yards) from the Jame Masjid mosque in the heart of the city.

A pall of smoke hung over the city. Tyres had been set on fire at almost every major street corner, and mobs were bringing out logs, stolen furniture and other items to feed the flames.

City authorities imposed a curfew from 2:00pm "to maintain law and order, and to protect the loss of life and property".

"The security forces can fire if anyone is seen violating the curfew," state radio announced. "Residents are urged not to come out of their houses in the specified areas under curfew."

A militant Iraqi group said on Tuesday it had killed the 12 Nepali hostages, who went to Iraq to work as cooks and cleaners for a Jordanian firm, and showed pictures of one being beheaded and the others with bullet wounds to the head and back.

Protesters shouted "Down with Islam", "Long live the memories of the 12 Nepalis", or called for the government to resign for not doing more to protect the victims.

There is no history of significant anti-Muslim protests or riots in mainly Hindu Nepal, but there have been widespread and sustained anti-government protests this year.

Tension was also high after Maoist rebels imposed a blockade on the capital earlier this month.

THICK CLOUDS OF SMOKE
Riot police cordoned off the mosque, which was obscured from afar by thick clouds of smoke rising from burning tyres on roads leading to the building.

"Demonstrators entered the mosque, threw stones and partially damaged it," said police official Binod Singh. "They tried to set the building on fire but police intervened and prevented them. The building has been cleared. No one was injured."

Offices of manpower companies which recruit Nepalis to work abroad were also indiscriminately attacked and their contents burned on the streets.

Impoverished Nepal does not allow its nationals to travel or work in Iraq because of security concerns but many go to the country from other nations in the Middle East.

About 3.5 percent of Nepal's 27 million people are Muslim.

"This inhuman act is against Islam," a Nepali Islamic group said in a statement on the killing of the 12, the largest number of foreign captives killed at one time by militants in Iraq.

Groups of protesters took to the streets of Kathmandu late on Tuesday after news of the killing spread. Relatives of the victims were among those accusing the government of not doing enough to help the victims.

"The government did not do enough to get their release," said Sudarshan Khadka, the brother of Ramesh Khadka, one of the victims, in his village about 25 km (16 miles) outside Kathmandu.

About 800,000 Nepalis work as labourers, drivers, guards, cleaners and cooks in different countries -- 200,000 of them in the Middle East.

They send about $800 million home to their families each year, a major source of income in one of the world's 10 poorest countries.

Nepal's embattled government is struggling to contain an insurgency by Maoist rebels seeking to replace the constitutional monarchy with one-party communist rule.

The government's mainstream political opponents have staged months of protests in a campaign for the revival of a parliament dissolved by King Gyanendra two years ago.