Nepal's President Ram Baran Yadav has directed Army Chief Gen Rukmangad Katawal, sacked by Prime Minister Prachanda, to continue in office in a face-off between the two leaders that threatens to escalate the political crisis and derail the peace process.

Hours after Prachanda sacked Gen Katawal yesterday accusing him of defying the government's orders by reinstating eight Generals retired by the Maoist administration, the President told the Army Chief to remain in the post.

"Being the head of the state and the supreme commander of the Nepal Army I order you to continue with your duty," Yadav said in a letter sent to Gen Katawal late Sunday night.

Copies of the letter were sent to the Prime Minister's Office and six regional headquarters of the Army.

"The dismissal of the Army Chief and the new appointment do not meet the constitutional requirements and due process," the President said.

As Yadav refused to endorse the decision taken by the Maoist cabinet on Sunday, Prachanda convened an urgent cabinet meeting today to discuss the current political situation. He is also scheduled to address the nation.

The President's move comes after he asked Prachanda, a former Maoist rebel leader, to follow constitutional provisions and seek a political consensus over firing Gen Katawal.