In a major setback to Nepal's fragile peace process, Maoists walked out of the government on Tuesday after Prime Minister Girija Prasad Koirala rejected their demand to declare Nepal a republic before the constituent assembly polls.

Four Maoist ministers resigned en-masse from the Koirala-led interim government, which the former rebels had joined in April after signing a peace deal that ended the decade-old insurgency in the Himalayan nation.

Minister for Information Krishna Bahadur Mahara, Minister for Local Development Dev Gurung, Minister for Physical Planning Hisila Yami and Minister for Women and Social Welfare Khadga Bahadur Bishwokarma resigned from the government on Tuesday.

The Maoists had issued a deadline of September 18 to fulfill their 22 point demand, which include declaring Nepal a republican state by abolishing monarchy and holding constituent assembly polls through the proportionate voting system. But negotiations failed after Koirala stuck to his earlier decision that the fate of monarchy should be decided through the constituent assembly polls.

Maoist chairman Prachanda and senior leader Baburam Bhattarai walked out of the four party meeting after it failed to reach a consensus, said Nepali Congress central member Arjun Narsingh KC.

"This is not the end of the dialogue with Maoists, there is still a possibility of continuing dialogue to resolve the issue. Talks are still going on among the seven party alliance leaders to resolve the stalemate. We are trying to reach a consensus," said KC after the meeting.

Others present at the crucial meeting were CPN-UML general secretary Madhav Kumar Nepal and Nepali Congress Democratic president Sher Bahadur Deuba.

The seven party alliance leaders have urged the Maoists not to quit the government and have requested them to withdraw their agitation programme.

The Maoists are also planning to hold a mass meeting in Tundikhel, where Prachanda, Bhattari and other senior leaders of the party are expected to address the crowd. At the meeting, Maoist leaders are likely to announce their plans to launch a fresh agitation.

Demonstrations by thousands of Maoist cadres, who are demanding that the government accept their demand for a republic, threw normal life out of gear in Kathmandu on Tuesday.