Kathmandu, which suffered tens of thousands of dollars in damage Wednesday when furious crowds torched offices of Arab airlines and businesses, was quiet yesterday with police given shoot-on-sight orders against rioters.

The city's main mosque, the Jama Masjid, was still smouldering as Muslims collected pieces of the Koran burnt when protestors stormed the shrine and gutted it.

But protests spread to the western Nepalese city of Palpa, where police said they fired 12 rounds of blanks to disperse a crowd of 3,000 people chanting slogans against Iraqi insurgents.

"At least two demonstrators were injured when police used a baton-charge to break up the crowd," a witness said. Police said they feared the protesters would vent their fury by attacking businesses.

Butwal, a city 40km south of Palpa, imposed a curfew as a precaution.

Shops and schools were shut nationwide and the Himalayan kingdom's twin-triangle sun-and-moon flag was flown at half mast in official mourning for the victims of the worst hostage massacre in post-war Iraq.

Maoist rebels, who rule much of the countryside and claim to be fighting on behalf of the poor to abolish the monarchy, chastised authorities over the hostage deaths.

"The government has made a big blunder," said a statement by Maoist chief Pushpa Kamal Dahal, better known as Prachanda, or "The Fierce."

"Through a short-sighted policy the government is encouraging Nepalese to go abroad only to lose their innocent lives," Prachanda said.

Nepal, which is not part of the US-led coalition in Iraq, is one of the world's poorest countries, fuelling an exodus of tens of thousands of young people to low-level and often risky work overseas.

The riots erupted hours after an Islamist website published grisly footage of the killings of the Nepalese, who had flown to Jordan in hopes of being cooks and cleaners.