Nepal's President Ram Baran Yadav has directed Army Chief Gen Rukmangad Katawal, sacked by Prime Minister Prachanda, to continue in office in a faceoff between the two leaders that threatens to escalate the political crisis and derail the peace process.

Hours after Prachanda sacked Gen Katawal yesterday 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.