Nepali authorities also restored mobile phone services, run by state-owned Nepal Telecom, which were snapped after Gyanendra imposed the emergency on Feb. 1.

Officials said Madhav Kumar Nepal, chief of the Communist Party of Nepal-UML, was released on Sunday three months after Gyanendra sacked the government, suspended civil rights and detained top politicians, blaming them for failing to tackle a deadly Maoist insurgency.

Another communist leader, Amrit Kumar Bohara, was also freed, Kathmandu district administrator Baman Prasad Neupane said.

But UML officials said hundreds of other activists were still under detention and new arrests were being made, despite the lifting of the emergency.

Authorities have not given any numbers of those detained during emergency, but say so far about 600 people have been released.

The king, faced with mounting international pressure to restore democracy and free politicians, bowed at the weekend and lifted the emergency but has retained all extraordinary powers he assumed on February 1.

The royal government had cut off all phones and blocked Internet access when it imposed the emergency to prevent politicians from organising protests, but restored landline services after a week.

"Mobile phones have just started," a Reuters correspondent said on Monday, using his mobile phone for the first time since Feb. 1. Other users also reported their mobile phones were working.

The latest moves by the government came as fissures emerged within the powerful Maoist group fighting to overthrow the constitutional monarchy in one of the world's 10 poorest nations.

Maoist rebel chief Prachanda, who uses only one name, accused his deputy Baburam Bhattarai of defying party decisions.

"The party hopes that he will overcome his weakness and follow the process of changing himself," the elusive chief of the guerrilla group said in a statement made available to Reuters on Monday. He did not elaborate.

Nepal's army, which has been deployed to crush the Maoists, had claimed earlier that there was a split between Prachanda, thought to be a hard-liner, and Bhattarai, who led the rebel group in failed peace talks with the government in 2003.

Meanwhile, thousands of people marched through Nepal's capital on Sunday in May Day protests calling for democracy and an end to direct rule by King Gyanendra following his power grab three months ago, witnesses said.

It was the largest demonstration in Kathmandu since Gyanendra sacked the government as demonstrators marched in two separate protests organised by unions to commemorate the May Day labour holiday and used the occasion to call for an end to the king's direct rule, witnesses said.

Officials estimated the two rallies at more than 5,000 people, who stayed away from heavily-patrolled restricted areas around the king's palace and government offices.

Police did not stop the protests against the monarch despite a ban on criticism of the takeover reaffirmed Saturday after the king lifted the state of emergency imposed after his power grab.

Protestors displayed signs such as "Long Live Democracy, Down With Autocracy" in the peaceful march. (Reuters, AFP)