Two years after King Gyanendra gave up absolute power in the face of mass protests led by the Seven-Party Alliance, Nepal was declared a 'federal democratic Republic' on May 28.

The base of the powerful monarchy was shaken as India put its weight behind the 'People's Movement' for popular rule in April 2006. New Delhi has provided support to Nepal in the democratisation process since the signing of the 12-point agreement between the main political parties and the Maoists.

The Maoists, who joined mainstream politics after a 2006 peace deal with the interim government led by G P Koirala, took part in the landmark April 10 Constituent Assembly elections after months of deadlock with the government over poll procedures.

With the international community looking on, Nepal held the April Assembly polls to decide the fate of the 240-year-old monarchy and frame a new Constitution.

The CPN-Maoist of the former guerrillas emerged as the single largest party with 220 seats out of a total 575 declared, followed by the country's oldest party Nepali Congress which received 110 seats while CPN-UML got 107 seats.

In a development that could hardly be visualised few years back, dethroned King Gyanendra vacated the Narayanhity Royal Palace of his ancestors on June 11.

Nepal also elected Indian-origin President Ram Baran Yadav as the first head of state. Vice President Parmanand Jha took oath of office and secrecy in Hindi that sparked nationwide protests.

The Himalayan state swore in its first post-royal government on August 22, ending months of political deadlock over power-sharing. Maoist chief Prachanda was elected Prime Minister, who formed a coalition government, from which the second largest party, Nepali Congress, was excluded.

On the foreign policy front, Prachanda's visit to China to attend the Beijing Olympics in August sparked a controversy as it was a break from tradition under which Nepalese leaders made New Delhi the first port of call after taking office.

The Maoist government sought a review of the historic 1950 Indo-Nepal Peace and Friendship treaty so as to reflect contemporary realities and India expressed readiness for it. However, the two sides agreed to do some home work to decide on what type of changes should be made to the pact.

In the first high-level visit from India after formation of the Maoist government, External Affairs Minister Pranab Mukherjee visited Nepal from November 24-26 to push the bilateral ties to the "full potential" and emphasise New Delhi's support to Nepal's democratic transition.

The two neighbours held extensive discussions on a wide range of issues including bilateral cooperation, trade and commerce, Koshi barrage, hydropower, border problem, railway links, regulating open border and extradition treaty.

"Historically close and friendly relations between India and Nepal have resulted in high-level interactions in the past few months," Mukherjee said while noting that Prachanda had visited India twice since becoming the Premier in August.

Mukherjee held a "very productive" meeting with Prachanda during which issues of bilateral concern, including repair of the Kosi embankment and maintenance of the East West highway were discussed.

Prachanda assured Mukherjee that Nepal was committed to creating an investment friendly and conducive environment to attract Indian investors to the country.

Expressing happiness over Nepal's transition to democracy, Mukherjee expressed India's commitment to provide assistance to the Himalayan state "in whatever way it wants".

With an aim of settling their differences over some parts of the border, India and Nepal agreed to make "certain corrections" in the 1800-km-long boundary, 98 per cent of which has already been demarcated.

They also discussed the contentious border areas of Susta and Kalapani, over which the two sides have divergence of views with Nepal alleging that India has encroached in some areas.

Prachanda visited India in September and met Prime Minister Manmohan Singh and most of the top political leaders in New Delhi. He again visited India on November 11 to participate in the BIMSTEC meet.

Nepal's northern neighbour China also sought to boost its relations with the Maoist government. Giving a major push to their bilateral cooperation, China pledged to provide training and security-related equipment to Nepal and agreed to explore ways to expand the strategic rail service from Tibet to the Himalayan country.

Chinese Foreign Minister Yang Jiechi, who was in Nepal soon after the visit of the Indian External Affairs Minister, promised a USD 15 million grant to Kathmandu for various development projects and responded positively to its request for USD 200 million more in soft loan.

Prime Minister Prachanda underlined Nepal's commitment to 'One China' policy and assured Beijing that his country would not allow any anti-China activity from its soil.

The US indicated that it was in favour of removing the ruling Maoist party from its terrorist blacklist. Since the Maoists took office, Washington has reversed its previous policy of not dealing with the ultra leftist group. Prachanda met President George W Bush during his September visit to the US to attend the UN General Assembly's annual meet.

On issues of national politics, Prachanda agreed to discharge over 3,000 child soldiers linked to the former Maoist guerrillas and stationed in the UN monitored cantonments.

The ruling CPN-Maoist was engaged in the midst of a crucial debate regarding the future political system in the country -- whether to continue with multi-party system or opt for a single party Communist rule.

The CPN-Maoist held meetings of their 13 State Councils in November during which Prachanda submitted a political paper that favoured multi-party democracy. However, the hardliners led by Mohan Vaidya 'Kiran' sought to push for establishment of 'people's Republic' or 'single party dictatorship'.

Political parties remained deadlocked on the government's effort for the merger of the Maoists' People's Liberation Army with the national army, as the Nepali Congress opposed the politicisation of the forces.

"We are not against the rehabilitation of the Maoists combatants but it should not be done in a way that drags the army into politics," Koirala told a key meeting of his party.

Differences among the main political parties have delayed the Constitution drafting process in the country. The government and the opposition have now set May 27, 2010 as the deadline for drafting a new Constitution, a key task for the 601-member Constituent Assembly.