KATHMANDU (Reuters) - Nepal stood on the brink of fresh political turmoil on Sunday as wrangling over the young Himalayan republic's first federal constitution ground towards a midnight deadline.
A new constitution is widely seen as crucial to helping end the instability that has plagued Nepal since the end of a Maoist-led civil war in 2006 and subsequent overthrow of the monarchy, but it has been thwarted by demands for the country to be divided into states along ethnic lines.
The debate has sparked violent protests in recent weeks and ethnic groups have staged demonstrations near the parliament building where a Constituent Assembly of politicians has until midnight to end its haggling and agree on the new charter.
If it misses the deadline set by the Supreme Court, the assembly - which doubles as a parliament - will be dissolved, creating a power vacuum and risking further unrest in a poverty-stricken nation dependent on aid and tourism.
"The demands for ethnic autonomy have become so strong that if they are not addressed they could lay the seeds for further conflict as happed in Sri Lanka and Aceh," said Kunda Dixit, editor of the Nepali Times weekly.
Rallies were banned around key government buildings in Kathmandu, including the prime minister's office, as the clock ticked towards the deadline, and parliament was ringed by helmeted riot police behind concertina wire barricades.
The Rajdhani daily said the army was on high alert and ready to step in if police fail to maintain security in the capital.
Prolonged instability in Nepal, which sits on the source of rivers that supply water to millions in South Asia, could suck neighbors China and India into competition for influence there. Both are important aid donors and trade partners for Nepal.
Diplomats say that because of its political uncertainty Nepal has failed to exploit the export potential presented by the rapid growth of its giant neighbors and investors have avoided the country. The economy grew by 3.5 percent last year, its lowest rate in four years.
The new constitution is a key part of the peace deal struck with the Maoists to end their revolt. But an agreement on the charter has been elusive and the assembly has missed several deadlines already because of deep divisions over the number, boundaries and names of the nation's states.
The assembly is dominated by the Maoists, who waged their revolt on a pledge to empower the country's many ethnic groups after centuries of exclusion and discrimination.
The Maoists want the creation of up to 14 states named after ethnic groups, and are backed by several small Madhesi parties demanding an autonomous state in the country's southern plains.
"A constitution is not possible without federal states recognizing the identity of ethnic groups," said senior Maoist leader Narayankaji Shrestha.
The Maoists' political rivals say carving up the nation along ethnic lines will stoke tension between different castes.
Ram Sharan Mahat, a Nepali Congress party leader, said the Maoists "want to kill the assembly, not make the constitution" and stay in power.
Editing by John Chalmers and Nick Macfie