By Gopal Sharma
KATHMANDU (Reuters) - Nepal's prime minister worked on Friday to form a coalition government that will include the main opposition parties after his cabinet quit as part of a negotiated effort to quell political tumult in the desperately poor Himalayan state.
Nepal, wedged between its giant neighbours China and India, has been plagued by instability for years even though a Maoist insurgency ended in 2006 and the monarchy was abolished, as the rebels had demanded, two years later.
The cabinet resigned at midnight after Prime Minister Baburam Bhattarai, a former rebel leader, struck a deal with opposition parties to end the political turbulence that has hurt the economy and delayed the introduction of a constitution.
The prime minister is expected to take a couple of days to form the new government, his spokesman told Reuters.
Opposition parties have been pressing for a consensus government before they agree on the new constitution, a key condition of the peace deal that ended a conflict in which more than 16,000 people were killed.
Negotiations on the constitution are stuck on several issues, including the formation and number of federal provinces.
Some analysts said it was unclear if the Maoist-dominated constituent assembly would be able to finalize the constitution before a May 27 deadline.
"The two differences in the new constitution are too fundamental to be resolved just by a consensus government," said Kunda Dixit, editor of the Nepali Times weekly.
"These should be debated by experts and demographers and should not be part of a political give and take," Dixit said.
Several ethnic groups are demanding separate states in the new constitution. The debate has triggered violence - four people were killed in a blast this week in the southern town of Janakpur, where protesters were calling for a separate state.
Instability has spooked investors and distracted parliament in a country which suffers a chronic shortage of electricity, drinking water, fuel and growing lawlessness.
Nepal, heavily dependent on aid and tourism, is home to Mount Everest and sits on the source of rivers supplying water to millions in South Asia. It has huge potential to generate hydroelectric power, and energy-hungry China and India are vying to win it over as an ally.
The economy grew by 3.5 percent last year, the lowest in four years, and tens of thousands of frustrated young Nepalis leave the country every year to seek menial work in Korea, Malaysia and the Middle East.
(Reporting by Gopal Sharma; Editing by Robert Birsel and Ross Colvin)