At least 21 Nepalese security personnel and four Maoists were killed during a major attack by the Maoist rebels on Wednesday.
A Maoist statement issued shortly after the incident has threatened more attacks.
"Our attack against the autocratic regime will further intensify in the days ahead," said Maoist supremo Prachanda's statement.
Also, over 1000 people were arrested while holding protest rallies to mark the first anniversary of the power grab by King Gyanendra, who claimed to have contained terrorism and vowed to hold parliamentary polls by 2007.
In some places, police fired at rallies and baton-charged activists who held demonstrations across the country as part of the 'Black Day' being observed by seven major political parties, journalists, rights activists and civil society members.
In an address to the nation, the King vowed to go ahead with the February 8 municipal polls and said that the parliamentary polls would be held in 2007.
He added that Nepal wanted friendly relations with all countries, including India and China, and wanted the nation to benefit from the two giant economies by acting as a transit point between them.