Home Minister Krishna Prasad Sitaula told reporters new electoral constituencies would be added for key elections due to be held before June, and the demand for increased federalisation of the Terai region would be addressed.

"In principle we have agreed to establish a federal state of government but the new constitution to be formed by the constituent assembly will decide on the structure," Sitaula told reporters after three hours of talks between leaders of the seven parties in government and the Maoists.

"The new constituencies will be formed based upon population and geography. This is the demand of the Nepali people," the home minister said.

"We think we have addressed the key issues of the Mahadhesi people and we are hopeful that the protests will cease," Maoist spokesman Krishna Bahadur Mahara told AFP.

The agreement comes after nearly two weeks of rioting in Nepal's impoverished southern Terai region by members of the Mahadhesi community, who have long complained of being discriminated against and underreprese-nted in government.

The Terai area, known as Nepal's "bread basket", is a low-lying region bordering India and is dominated by the Mahadhesi community.

Mahadhesi leaders say their group accounts for at least a third of impoverished Nepal's 27 million people yet is under-represented in Kathmandu's corridors of power -- even after the recent sidelining of the king.

The group wants to see the region made into a federal state within Nepal and wants more representation in government.

Nepal's government has arrested two royally appointed former ministers, and placed other royalists under surveillance after accusing pro-royal elements of stirring up the unrest.

Nepal's king was forced to end his absolute control over the country in April last year, after massive protests organised by sidelined political parties and the Maoists. The king has since been stripped of most of his powers, but is still revered by many as a Hindu deity.

Late last year, the Maoists and government signed a peace deal that put an end to a decade of civil war. As part of the peace deal, the country will get a new constitution that could abolish the 238-year-old Shah dynasty.