By Charles Haviland
Nepal's most powerful parties have agreed that the 240-year-old monarchy will be abolished, yielding to a demand put by the Maoist former rebels when they walked out of the interim government three months ago.
Young Maoists are suspected of being behind some of the violence
The historic decision reverses a clause of last year's peace agreement which said the fate of the royals would be decided by a popularly-elected assembly.
Parliament must now change the temporary constitution.
It will be left to the assembly, once elected, to actually scrap the monarchy - but that is looking almost inevitable.
The move concludes a dismal year of continuing violence, new militant ethnic sentiment and endless political squabbling - a big contrast to 2006 which saw the end of the Maoist insurgency and, earlier, King Gyanendra's climb-down from direct rule.
Although their walk-out meant elections were postponed for a second time, the Maoists say they will now rejoin the cabinet and stand in polls rescheduled for next spring.
Speaking to the BBC, senior Maoist leader C.P. Gajurel denied his party feared facing the voters.
"We are committed to multi-party democracy, peaceful competition in the election," he said. But, he added, "definitely we will not go for the previous so-called parliament". The Maoists, Mr Gajurel said, wanted a new kind of parliament where "oppressed classes can compete".
The Maoists' democratic credentials are yet to be tested.
Their new youth wing, the Young Communist League or YCL, is doing some useful things such as road works and city clean-ups.
But the YCL - believed to include many former fighters now meant to be in camps under United Nations supervision - is also committing many punitive acts.
A senior doctor, Gyanendra Giri, told me about his abduction by 30 YCL members after a disgruntled acquaintance asked the young Maoists to punish him. He was tortured for 14 hours with rods, boots and fists.
The Maoists have also admitted to killing a journalist in southern Nepal.
With similar incidents continuing, their embarrassed leaders have apologised in some, but not all, cases.
Some politicians are critical.
"We have suspicions about the integrity of the Maoists, about their fully entering in the democratic system and total abandonment of violence," says former minister and peace negotiator Pradeep Gyawali.
Political writer Deepak Thapa says there is also a wider sense of anarchy, with anyone feeling they can take direct action, law and order worsening, and the government barely responding.
People aggrieved by almost anything will put up road blockades. "They feel that is the only way they can get their voices heard," says Mr Thapa.
Rajan Mukti believes the armed struggle will bring the Terai rights
In that unstable atmosphere, there are other big questions, too. The United Nations peace mission here, Unmin, is concerned about what will happen to the thousands of former Maoist fighters now confined in camps.
Will the conservative Nepal Army agree to absorb them? Will it accept the abolition of the monarchy it has so loyally served in the past? Indeed, how will King Gyanendra - currently keeping a very low profile - react?
Madhesis ask questions
Perhaps most worrying of Nepal's new troubles is the violence in the Terai, the southern plains, where an ethnic community known as the Madhesis - roughly a third of Nepal's population - is now demanding rights after years of neglect.
People of hill origin, loosely known as Pahadis, have always ruled Nepal. The Madhesis complain there is no sign of this changing.
Political violence has killed over 100 people there this year.
In the city of Janakpur a prosperous doctor, Vijay Singh, dressed in a lungi like a sarong, served me tea. An assertive advocate of the Madhesi cause, he dismisses the notion that Madhesis feel closer to India, despite cultural similarities.
"We are essentially Nepalese," he said. "[But] we have not been provided citizenship easily. In all the structure of Nepal, the police structure, army structure, any wing of the government, the representation of Madhesis is almost nil."
Many groups voicing such grievances have formed. Some are moderate. Some are militant, carrying out constant killings and kidnappings.
In a secret location I met Rajan Mukti, an unsmiling 25-year-old in a white shirt and red scarf, representing a major underground group called the JTMM Jwala Singh faction.
He wants complete independence for the Terai.
"Our liberation army punishes anyone who supports the absolute rule of the hill people. We want to destroy those Pahadi people who have absolute power and those supporting them."
Ethnicity makes many a target. I visited Madhav Acharya, an old, deaf man. A militant group has confiscated the land where he grows his paddy.
"More than 70% of the Pahadis here in Janakpur have left. They've been displaced," he said.
"But it's difficult for me. My children are studying. I can't go anywhere else. I'm scared, but I don't know who to turn to."
The Madhesis - a third of the population - want more rights
Conversely, Madhesi campaigners say the authorities ignore their grievances. Madhesi human rights activist Dipendra Jha fears that a new task force sent in to tackle violence is counter-productive.
"Most of the armed forces are from the hilly area," he says. "They don't know about the cultural, social sensitivity of the Terai. Most politicians perceive the problems in the Terai as a security problem rather than looking at the political, social, economic, cultural demands. So the situation is getting worse and worse."
In several other regions, too, as ethnic sentiment grows, self-defence groups are emerging in the name of different communities.
In fact, Nepal consists of dozens of minorities, geographically intermingled but now demanding a voice.
They will be hoping to be better heard, as under the new agreement more than half the assembly members will be elected under proportional representation.
But in a deeply uneven, caste-dominated, male-dominated society, securing real change will not be easy.
Getting rid of the monarchy may be just one small detail in a much larger process of upheaval.