The deal, aimed at ending 10 years of bloody insurgency by the rebels, was thrashed out at unprecedented day-long talks in Kathmandu Friday between Maoists, led by their elusive chief Prachanda, and government leaders headed by Prime Minister Girija Prasad Koirala.

Under the deal, the new parliament, reconvened after King Gyanendra ended 14 months of direct rule in April, is to be dissolved and an interim government containing the Maoists set up within a month.

Newspapers trumpeted the accord on their front pages, branding it "historic" and a "giant leap forward", although some politicians gave the move a more guarded response.

"The agreement reached in an effort to restore peace is very promising but there are lots of challenges," said Ram Chandra Poudel, general secretary of the Nepali Congress, the kingdom's largest political party.

"The government should move forward very cautiously and avoid making hotch-potch decisions," he said.

The deal was warmly welcomed by Raghuji Pant, a leader of the Communist Party of Nepal (Unified Marxist-Leninist), the tiny nation's second largest political grouping.

"This is a very positive development and it shows that the government and Maoists are willing to resolve the political crisis," he said.

As well as dissolving the new parliament, the two sides agreed Friday to seek United Nations assistance in arms management, and to draft a temporary constitution within 15 days.

The rebels and government had previously agreed to hold elections for a body that would redraft the constitution permanently, a key rebel demand.