Nepal raises national flag in palace

KATHMANDU (Reuters) - Nepali authorities raised the national flag at the palace of dethroned King Gyanendra on Thursday, hours after stone-throwing demonstrators clashed with police and tried to storm inside.

More than 25 people were injured when police beat the crowd back with bamboo sticks but protesters continued to shout anti-king slogans.

"Gyanendra, thief, leave the palace!" they shouted.

Earlier on Thursday, the royal flag was lowered from Nepal's palace as the Himalayan nation celebrated its first day as a republic following the abolition of its 239-year-old Hindu monarchy.

A special assembly elected in April voted to abolish the monarch and gave Gyanendra a fortnight to vacate the sprawling pink palace in Kathmandu. His palace will be turned into a museum.

That vote was a key condition of a 2006 peace deal with the Maoist former rebels who ended their decade-long civil war and joined mainstream politics.

"Vive la Republique," read a banner headline in the Kathmandu Post.

"A hope is born," said the Himalayan Times daily.

About 500 people shouting "This is the people's victory" marched in celebration of the new republic.

"I feel really honored," said 27-year-old university student Dev Raj Bhatta standing in sweltering heat outside the palace gate earlier on Thursday.

"The end of the monarchy has made me a proud Nepali citizen."

The U.S. government, which classifies the Maoists as a terrorist organization, gave its support to the new republic.

"This is another exciting milestone in Nepal's democratic development," a U.S. embassy statement said.

Deputy Assistant Secretary Evan Feigenbaum said he held talks with all major Nepali political leaders this week and raised U.S. concerns about political violence.

He declined to comment on whether or when Washington would review the Maoists' designation on two U.S. terrorism lists.

"The degree to which we can work with anyone in Nepal will depend very directly on the degree to which they continue to embrace the political process and abandon violence," Feigenbaum told reporters in Washington.

WHAT NOW?

But challenges remain.

The Maoists, who won 220 seats in last month's elections to the 601-member assembly, are expected to head the new government. But they must fulfill tremendous expectations in one of the world's poorest countries.

Thousands of ex-Maoist fighters are still confined to camps. Maoists insist they must be integrated into the military. The army, traditionally seen as having royalist sympathies, has so far refused to allow them into their ranks.

During their election campaign the Maoists promised land to landless farmers in a country where more than 80 percent of its 26 million live on farms and jobs to the unemployed youth.

"There is now a big challenge for the Maoists both to prove their democratic credentials and to deliver on the mandate for the change," said Rhoderick Chalmers, Nepal head of the Brussels-based International Crisis Group.

Economic growth was just 2.3 percent in the year to July 2007 compared with 3.1 percent the year before.

Although tourists, a key source of income, have started to return after the end of war, businesses are yet to rebound. The economy is hugely dependent on foreign aid and remittances from Nepalis aboard.

"The new government must revive industries, end frequent labor strikes and resolve the acute problem of fuel as well as power supply to revive growth," one Asian diplomat said.

"This is a real challenge."

For now, on the streets of Kathmandu the mood was jubilant.

"I am very happy that we are a republic now," said Rupesh Ranjitkar, 25.

"There will be peace now. I don't think anyone will miss the king or shed any tears."

(Editing by Bappa Majumdar, Valerie Lee and David Wiessler)