Protests against the killing of 12 Nepalese nationals by militants in Iraq spread to western Nepal forcing the authorities to impose curfew in the city of Butawal as the Himalayan kingdom observed a day of national mourning for the slain hostages.

In Kathmandu, which witnessed large-scale violence during which two people died in police firing yestrday, curfew was relaxed for three-and-a-half hours in the morning and two hours in the evening to enable the people to buy essentials.

The home ministry said the situation in the capital remained calm and quiet.

The government cancelled the licence of the agency, which had sent the 12 Nepalese to Iraq through "illegal channel" and has increased the insurance amount for those seeking overseas employment from Rs 100,000 to Rs 10 lakh per person, Minister of State for Labour and Trasport Raghuji Panta said.

The state-run Radio Nepal quoting him reported that the government was also contemplating cancelling licences of 109 other manpower agencies engaged in 'illegal businesses'.

National flag flew half mast, government offices, schools, colleges and businesses remained closed, public
transport stayed off the roads and radio and TV stations played patriotic and religious songs as army and paramilitary forces patrolled the streets of the capital.

In Butawal city of Rupandehi district, hundreds of people tried to block roads by burning motor tyres to protest the killing of the hostages.

One person was injured when police opened fire to disperse the demonstrators, Home Ministry spokesman Gopendra Bahadur Pandey said.

As tension ran high, authorities clamped curfew in Butawal as a precautionary measure, officials said.

During the relaxation in curfew in Kathmandu, people rushed to the market to fetch consumer goods and some were seen surveying the damage caused by violence yesterday.

During yesterday's protests angry crowd had attacked a mosque in Kathmandu and offices of some West Asian airlines and Pakistan International Airlines.

There were no incidents overnight in Kathmandu or Lalitpur, which was also placed under a 24-hour curfew, a Home Ministry official said.

Meanwhile, Maoist rebels in a statement alleged that the government 'through a short-sighted policy' is 'encouraging Nepalese to go abroad only to lose their innocent lives'.

"The government has made a big blunder," Maoist leader Pushpa Kamal Dahal, alias Prachanda, said in the statement.