Prachanda's unilateral move to fire Gen. Rookmangud Katawal had prompted the president to overrule him Sunday. Coalition partners also withdrew their support of the Maoist-led government, stripping it of its parliamentary majority.
But Maoist hardliners – who wanted to replace General Katawal with a leader more willing to integrate fellow ex-rebels into the Army – supported the sacking.
The prime minister's decision to fire Katawal highlights the immense pressure he had been facing from within his party.
"Prachanda chose to lose his premiership rather than lose his command over his party," says Ameet Dhakal, editor of Republica, a leading English-language daily.
The political disarray also jeopardizes a peace process launched in 2006, which invited former rebel Maoists to join the government and help write a new constitution by 2010.
But in his televised address announcing his resignation, Prachanda ruled out the possibility of his party returning to war. "I remain committed to the ongoing peace process," he said.
He also defended his decision to sack Katawal as asserting civilian supremacy and accused President Ram Baran Yadav of making an "unconstitutional and undemocratic move."
Sacking ends up hurting Maoists
The pullout of two key parties – including the second-largest coalition partner, the Communist Party of Nepal – cost the Maoists 118 votes in the 601-member parliament. The Maoists command 238 seats after a surprise win in assembly elections last April. Another coalition partner, the Madhesi Janadhikar Forum, which holds 51 seats, may also quit.
These and other political parties saw Prachanda's move as a step toward helping Maoists establish a Communist state, says Mr. Dhakal.
Katawal had opposed efforts to fold into the Army some 19,000 former Maoist fighters, arguing that they were "politically indoctrinated." That's why Maoist hardliners had wanted Lt. Gen. Kul Bahadur Khadka, who is set to retire next month, to replace Katawal in the top post. But if Katawal were to serve his full term, which expires in August, General Khadka would no longer be in line for Army chief.
In firing Katawal Sunday and promoting Khadka, Prachanda ignored opposition from all four of the Maoists' coalition partners.
Analysts say Prachanda realized the political risk but went ahead to pacify party hardliners. "It is clear that the Maoists, especially the hardliners, have still not understood that in democracy, a government has to be accommodative, and cannot always have its way," says Dhakal.
The Maoists had accused Katawal of defying government orders in three incidents: recruiting some 3,000 personnel into its ranks in February; welcoming back eight brigadier generals whom the government had told to retire in March; and pulling athletes from the Army out of national games in April to protest the participation of former rebel fighters.
In his defense, Katawal has said that the recruitment had nearly been completed by the time the government requested that it stop; that he accepted the eight brigadier generals after the country's highest court provisionally reinstated them; and that the decision to pull the athletes had come from the Army's Sports Wing, not from him.
But most analysts say these reasons didn't justify firing the chief. "Ever since joining the peace process, the Maoists indicated that they are interested more in consolidating power than delivering on their promises," says Krishna Khanal, a political scientist at Tribhuvan University.
He argues that, since coming to power, the Maoists could have done much to make life easier for Nepalis. "But their focus was elsewhere. They believe that the entire state machinery, including the bureaucracy and security forces, are against their totalitarian dreams. Hence their effort to weaken the machinery," he says.
Indeed, life in Nepal remains difficult in many ways. Last winter, Nepal faced unprecedented power cuts – up to 18 hours a day. Inflation has risen to 13 percent. Essential commodities, including food and fuel, have remained in short supply for months owing to strikes by several ethnic groups along major highways of the country.
There is a lack of liquidity in the market owing to capital flight caused by plummeting confidence among local investors in the Maoist commitment to the right to property. And security remains a burning issue as dozens of armed groups continue to employ tactics of intimidation and murder to further their political aims.
While announcing his resignation, Prachanda defended the Maoists' performance so far, noting his inexperience in government as well as a conspiracy by forces that didn't want the Maoist government to succeed.
Both sides in legal gray zone
Experts say the dispute over Kawatal has pushed the country to a legal and constitutional crisis.
Prachanda overstepped by firing the Army chief, says constitutional expert Bhimarjun Acharya. "The Army Act bars the government from ousting Katawal from office until he serves his full three years that ends in August," he explains. "The government's decision can be successfully overturned in court in case Katawal chooses a legal recourse."
But the president's move also constitutes excessive use of authority, Mr. Acharya continues, as the president can only suggest that the government correct its decision in case it is unconstitutional. "The president cannot overturn the government's decision," he says.
For the moment Katawal's position is secured unless the issue lands in court. A more pressing question now is who will lead the next government. Despite their crumbling coalition, the Maoists maintain a dominant presence in parliament.