The government said security had improved and that the clampdown in Kathmandu was no longer necessary.

Still, troops kept watch as businesses and markets reopened, and as workers removed broken glass and charred debris from buildings targeted in the violence.

A shoot-on-sight curfew was imposed last Wednesday after news that 12 Nepalese hostages had been executed by a group in Iraq, unleashed riots and protests that left two dead.

Thousands of people ransacked and set on fire Katmandu's only mosque, attacked Middle Eastern airline offices and threw stones at overseas recruitment agencies.

Similar riots broke out in other major cities, causing an estimated 1.5 billion rupees (US$20 million) in damage.

Schools and government offices were closed on Monday for a public holiday marking the birth of Hindu god Krishna.

Nepal, which has no troops in Iraq, has banned its citizens from taking jobs there because of security concerns. However, an estimated 17,000 Nepalese are believed to be working in Iraq - many as armed security guards for foreign contractors.