Politicians said it was a positive move but advised caution and urged the King to hold talks with political parties.

Constitutionally, the three-month state of emergency granting the military extra powers of search, arrest and curfew had to end or be formally extended by midnight on Sunday.

King Gyanendra's announcement made no mention of him giving up most of the extra powers assumed when he sacked the government, suspended democracy and took control himself on February 1 in a bid to end a long-running Maoist rebellion.

The King suspended civil liberties, arrested the ousted prime minister and gave sweeping powers to soldiers to fight the Maoist rebels, drawing international condemnation and failing to check the rebellion.

The midnight announcement came hours after Gyanendra returned from his first foreign tour since February 1, aimed at shoring up international support, a visit during which he convinced India to resume military aid.

He had reassured India and the United States, another major supporter, that he would restore democracy as soon as possible.

Upon his arrival at Tribhuvan International Airport the King said that during talks with Heads of States and Heads of Governments, he explained to them that "Nepal had given priority to the fight against terrorism and the Nepalese people's aspiration for restoring peace", according to Radio Nepal.

The King added that he was influenced by his meeting with Indian Prime Minister Manmohan Singh at the Asian-African Summit.

"I have taken the views expressed by Mr Singh seriously", the King told reporters at the airport.

In his proclamation, Gyanendra said he would continue the newly established Royal Commission for Corruption Control, set up after February 1 with sweeping powers to arrest, investigate and prosecute politicians and bureaucrats.

The panel arrested ousted Prime Minister Sher Bahadur Deuba after he refused its summons, rejecting it as unconstitutional.

Political leaders were cautious on Saturday.

"It is a positive move. But all political detainees must be released and the King should restore democracy, hold talks with political parties and activate the constitutional process," said Gopal Man Shrestha, acting head of Deuba's Congress (Democratic) party.

Pradip Nepal, a leader of the Communist Party of Nepal (UML), the biggest member of the multiparty government sacked by Gyanendra said he would watch the government for a week before making a comment. "I can't take the King by his words," he said.

"With the end of emergency rule, all the fundamental rights should deem to have been restored in theory and practice, said Yubaraj Ghimire, editor of the Nepali weekly, Samay.

"But whether they have been restored or not depends on the behaviour of the state. There are still some areas of confusion over the powers the King has retained.

"If the (royal) commission continues to behave as a terror organ of the state, lifting the emergency will not help much in Nepal's journey back to democracy."

Constitutional law expert Srihari Aryal said little changed.

"It is still the King's direct rule," he told Reuters. "There is fear in the minds of the people."