Nepal Prime Minister Prachanda resigned from his post on Monday.
Announcing his decision to step down through a televised address, Prachanda appealed to the army to maintain law and order.
The opposition Nepali Congress had sought Prachanda's resignation after the Maoist government was reduced to a minority in the wake of CPN(UML) pulling out in protest against the decision to sack the Army Chief.
The party also supported President Ram Baran Yadav's move to block Prachanda's action against Army Chief, saying "it was in accordance with the constitutional provision and in as per the mandate of all party meeting."
The CPN(UML) pulled out of the government on Sunday after Prachanda sacked Army Chief Gen Rukmangad Katawal for defying his orders on various issues.
The crisis is the worst to hit Nepal as a new Constitution is yet to be framed and the old constitution is silent on the appointment of Army chief, which was the prerogative of the King.
The crisis follows months of tussle between the Prime Minister and the Army Chief over the induction of former Maoist rebels into the Army.
The Maoists have also decided to hold talks with Madhesi People's Rights Forum and other smaller parties to retain majority in the 601 member Constituent Assembly.
Hours after Prachanda sacked Gen Katawal on Sunday accusing him of defying the government's orders by reinstating eight Generals retired by the Maoist administration, the President told the Army Chief to remain in the post.
'Being the head of the state and the supreme commander of the Nepal Army I order you to continue with your duty,' Yadav said in a letter sent to Gen Katawal late Sunday night.
Copies of the letter were sent to the Prime Minister's Office and six regional headquarters of the Army.
'The dismissal of the Army Chief and the new appointment do not meet the constitutional requirements and due process,' the President said.