Feb. 15 (Bloomberg) -- Nepal's new government lifted house arrest orders against two political leaders held under a state of emergency declared by King Gyanendra, as the U.S. and U.K. recalled their ambassadors over the monarch's power grab.

Surya Bahadur Thapa, a former prime minister, and K.P. Sharma Oli, a leader of the Communist Party of Nepal, were released yesterday, according to a report on the Nepalese government Web site. An estimated 1,000 political and student leaders and other officials have been held under the state of emergency imposed on Feb. 1, Agence France-Presse said last week.

The U.S. recalled its ambassador while it discusses with its international partners what steps to take ``to support the Nepalese people's quest for democracy,'' the State Department said in a statement yesterday in Washington.

King Gyanendra imposed the state of emergency after firing the government of Prime Minister Sher Bahadur Deuba for failing to control an insurgency by communist rebels that began nine years ago. The U.S, the United Nations and neighboring India have led calls for the release of detainees and for civil liberties to be restored in the Himalayan kingdom.

``When the king dismissed his prime minister, we regarded this as a backward step which undermined Nepal's democratic institutions,'' U.K. Foreign Secretary Jack Straw said in a statement issued yesterday in London.

Straw, who is visiting Pakistan, called on the rebels to end the insurgency and begin peace talks. Other European Union countries also recalled their envoys, AFP reported.

Rebel Blockade

Rebels who are fighting to replace Nepal's monarchy with a communist republic last week called for three days of protests, including blockades of highways, over the imposition of the state of emergency. The conflict has killed about 11,000 people in the Himalayan kingdom of 27 million people since 1986. Rebels in January rejected a deadline set by Deuba's government for starting peace talks that were last held in 2003.

The government yesterday released Sindhunath Pyakurel, the former president of the Nepal Bar Association, who was placed under house arrest on Feb. 1, according to a report on the government's Web site. Nepal's Supreme Court asked the government on Feb. 9 to explain Pyakurel's arrest.

House detention orders were lifted at the weekend on seven political leaders, the report said. Tanka Dhakal, the minister for information and communications, said at a news conference in Kathmandu at the weekend the government is providing ``security'' to the leaders because of a changed political scene in Nepal.

Dhakal called on Nepalese media to not write anything that may demoralize security forces or promote terrorism, according the government Web site.

New Ministers

King Gyanendra yesterday added two former prime ministers to the 10-member council of ministers he formed under his chairmanship on Feb. 2, according to a statement by the king's press secretariat reported on the Web site. Tulsi Giri will be minister for law and justice and Kirtinidhi Bistra will have the industry and commerce portfolio.

The rebel blockade has reduced traffic traveling to Kathmandu. The city was disrupted in December by a two-day general strike that closed shops and businesses in support of the rebels. It was subjected to a weeklong blockade imposed by rebels last August that cut food and fuel supplies to the 1.5 million people in and around the city.

To contact the reporter on this story: Paul Tighe in Sydney at ptighe@bloomberg.net.

Last Updated: February 14, 2005 19:01 EST