Prime Minister Pushpa Kamal Dahal announces his resignation in Katmandu on Monday. (Binod Joshi/Associated Press)

Nepal's prime minister resigned Monday following a confrontation with the president over the dismissal of the army chief — a move that had prompted several key parties to quit the country's first elected government.

"I am announcing my resignation from the council of minister," Pushpa Kamal Dahal said in a televised address after meeting with his cabinet and leaders of his Communist Party of Nepal (Maoist).

Dahal, a former Maoist rebel leader, sacked army chief Rookmangud Katawal on Sunday after the two quarrelled over the enlistment of former rebels into army ranks.

President Ram Baran Yadav, who officially commands Nepal's military, rejected Dahal's decision and ordered Katawal to return to work in a late night notice.

Nepal's Maoists fought a bloody, 10-year war against the government before joining the political mainstream in 2006 and winning the most votes during elections last year after the Himalayan country abolished its centuries-old monarchy.

However, many of the former Maoist fighters remain restricted to UN-monitored barracks under a peace accord.

Dahal wanted them freed and integrated into the military, as prescribed under a UN-brokered peace agreement. But Katawal resisted those efforts and sparred repeatedly with the government over the issue.

Dahal said Monday he decided to step down "to create a conducive environment and save the peace process."

After Dahal dismissed Katawal on Sunday, the Maoist's main coalition partner the Communist Party of Nepal (United Marxist Leninist) and other key coalition members withdrew from the government.

Dahal's Communist Party of Nepal (Maoist) has the most members in the national assembly but does not hold a majority, and needs the support of smaller parties to stay in control of the government.