Nepal's new government on Wednesday declared a ceasefire with Maoists and also decided to drop the terrorist tag on the rebels.

"We have decided to announce a ceasefire and remove the terrorist tag" from the Maoists, Deputy Prime Minister K P Sharma Oli told reporters after a Cabinet meeting.

The Maoists had declared a three-month unilateral ceasefire last week after King Gyanendra announced he would hand over power to the people and reinstate Parliament following over two weeks of protest by the opposition Seven Party Alliance against the monarch's direct rule.

The rebels also said the process of forming a Constituent Assembly that would rewrite the Himalayan kingdom's 1990 Constitution clipping powers of the King should start fast.