"It might be momentous news for others but it is a cause for profound sadness for us in Bhutan," state-run daily Kuensel quoted an unnamed resident of the capital, Thimphu, saying.

This month, King Jigme Singye Wangchuck said he would hand power to his son, Crown Prince Jigme Khesar Namgyel Wangchuck, and hold elections in 2008, shocking the Buddhist kingdom's estimated 700,000 people.

In March, Bhutan unveiled a draft of its first constitution aimed at setting up a two-party democracy after a century of absolute monarchy put in place with British support in 1907.

While elderly Bhutanese compared the royal announcement with the sun setting on the dragon kingdom, the talk of democracy excited many young citizens.

"We shouldn't be surprised but be proud and look forward with confidence and optimism," Nima Tshering, a resident of Thimphu wrote in a letter to Kuensel.

The newspaper said Bhutan had received the King's decision in stunned silence, and "the nation could not fathom the concept of His Majesty stepping down."

The newspaper said as the King made his announcement to a crowd of farmers, herders, teachers, students and civil servants they fell into a bewildered silence.

"The year 2008 is too early. Many of us feel that His Majesty should reign for another 20 years," Kuensel quoted a shepherd saying.

Bhutan's march to democracy contrasts dramatically with the neighbouring Hindu kingdom of Nepal, where King Gyanendra took total power and sacked the government in February.

Most Nepalis and their seven leading political parties are demanding a return to democracy.

About seven years ago, Wangchuck, who became king in 1972 at the age of 16 after his father's death, took a major step on the road to reform when he devolved power to a council of ministers.

In 2001, he initiated the drafting of a new constitution to replace a more than 50-year-old royal decree under which Bhutan has been ruled.

The draft speaks of two houses of parliament -- a 75-member National Assembly and a 25-member National Council. The King would remain head of the state, but parliament would have the power to impeach him on a two-thirds vote.

For years, the world's only entirely non-smoking country was considered the last Shangri-La, a land of 700,000 untouched by the winds of modernisation.

But the landlocked kingdom's window on the world is opening, with television arriving in 1999, the Internet a year later.