Army spokesman Colonel Deepak Gurung said 500 Maoists were killed as well as 18 soldiers and policemen on Saturday night as troops pushed the rebels from Bedi, headquarters of Myagdi district 300 km west of Kathmandu.
There was no immediate way to verify the toll. Previous claims by Nepal's armed forces of inflicting massive casualties during the eight-year insurgency have rarely been independently confirmed.
Maoists blew up the bridge at the entrance to Bedi before hundreds of rebels pushed in from three sides and immediately raided the jail, freeing a number of prisoners, including Maoists, local journalists said.
The guerrillas also looted a state-owned bank and bombed the district administrative office before soldiers who had been caught by surprise mobilised to fight them, according to a state security official.
The security official, who asked not to be named, said an army helicopter managed to swoop down despite hostile gunfire and rescue 16 policemen who were taken for medical treatment in the western city of Pokhara.
The official said 30 people were unaccounted for, including the district's top official, Chief Officer Sagarmani Parajuli, and the deputy police superintendent, Rana Bahadur Gautama.
"Decisive victory over the autocratic regime looms large on the horizon"
Pushpa Kamal Dahal,
In a second attack on Sunday morning, suspected Maoists set off bombs at the Meghauli airport in the southern Chitwan district which is visited by thousands of tourists each year who go on jungle safaris, police said.
The airport control tower and runway were badly damaged, shutting down flights but causing no casualties, a police official said.
De facto rule
The Maoist uprising has claimed more than 9,000 lives since 1996, according to official figures generally accepted by outside observers, with the rebels exerting de facto rule over much of the countryside.
Maoist leader Pushpa Kamal Dahal, in a statement released on Sunday which made no direct mention of the latest violence, boasted that a "decisive victory over the autocratic regime looms large on the horizon."
"The people's war is becoming more sophisticated against the feudal regime's attempt to foist authoritarian rule on the people with the support of the world's imperialist leader," he said, referring to US President George Bush.
The United States has offered military aid and strong political support to the kingdom in its crackdown on the rebels, who ended an eight-month ceasefire in August.