Nepal's Prime Minister Prachanda resigned on Monday after his Maoist government's decision to sack the army chief was scuttled by the President, deepening the political crisis and raising the spectre of renewed rebel unrest in the country.

"I have resigned from the post of prime minister from today for the protection of democracy and peace," 54-year-old Prachanda, who had taken the reins of the country eight months ago, said in a televised address to the nation.

The announcement came after President Ram Baran Yadav directed Army Chief General Rukmangad Katawal to continue in office, saying his dismissal by the cabinet does not "meet the constitutional requirements and due process."

The Maoist regime accused Katawal of defying the government's orders by reinstating eight Generals retired by the Maoist administration.

"The move by the President is an attack on this infant democracy and the peace process," Prachanda said, accusing him of taking an "unconstitutional and undemocratic decision."

"The interim constitution does not give any right to the president to act as a parallel power," said Prachanda, whose government was reduced to a minority after key ally CPN-UML announced withdrawal of support due to differences over the removal of Katawal.

The political crisis, which follows months of tussle between the premier and the army chief over the induction of former Maoist rebels into the army, is threatening the fragile peace process in the country that witnessed a decade-long insurgency waged by the Maoists before they returned to mainstream in 2006 after singing a peace deal.

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