Nepal's Maoist rebels have vowed to continue raids on government targets despite suffering a bloody setback that left around 500 guerrillas dead.
"The armed attacks will continue until a progressive political solution has been reached," the Maoist chief who goes by the one name, Prachanda, said in a statement.
Officials said soldiers were searching for bodies on Monday in Beni, 280 km (175 miles) west of Kathmandu, the site of what could be the deadliest single clash since the Maoists began a bloody revolt in 1996 against the monarchy.
Army officials said they had recovered the bodies of two soldiers, taking the number of security personnel killed in the clash to 20.
"We are searching for bodies and clearing bombs that have been left behind by the rebels," army spokesman Deepak Kumar Gurung told Reuters.
State-run Nepal Television showed footage of smouldering buildings with smoke billowing from nearby forests that caught fire due to mortars used by both sides.
Unexploded crude bombs littered the deserted streets of the riverside town which is on way to scenic Mustang, popular with foreign hikers.
Rebels set up road blocks and blew up a bridge on way to Beni to prevent reinforcements from arriving, one official said.
The rebels said Beni district administrator, Sagarmani Parajuli, was in their custody. A government official said they had been unable to contact Parajuli.
The rebels are demanding elections for an assembly to prepare a new constitution and decide the future of the monarchy. The government refuses the demand.
The Maoists, fighting to replace the monarchy with a one-party communist state, often target banks for cash to buy smuggled weapons, as well as jails to free captured comrades.
Outgunned by the army, they rely on sheer numbers and human shields from dragooned local villagers to overrun security posts, human rights groups say. The rebels deny using civilians as human shields.
More than 9,000 people, mainly rebels, have been killed in the brutal revolt.
Several attempts at peace talks have failed over core issues such as the ultimate fate of the monarchy, now in the hands of unpopular King Gyanendra after former King Birendra and several members of the royal family were massacred by the Crown Prince in 2001.
The revolt has wrecked the political and economic stability of Nepal, one of the 10 poorest countries in the world.
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