A palace statement on Saturday said the king, in accordance with the constitution, lifted the order of the state of emergency.
The king imposed emergency rule on 1 February, taking absolute power and suspending civil liberties. The move was widely condemned both within Nepal and internationally.
The emergency was due to expire on Monday, but the announcement came after Gyanendra returned on Friday from visits to China, Indonesia and Singapore, where leaders pressed him to restore democracy in Nepal.
Since emergency rule was imposed, hundreds of politicians have been jailed.
Opposition figures welcomed the decision to lift the emergency, but urged the king also to scrap the anti-graft Royal Commission for Corruption Control (RCCC), formed on 16 February.
The powerful anti-graft body can summon, investigate, and arrest suspects and file cases and pass judgment on corruption charges against figures including politicians, business people and civil servants.
Critics have said the commission is able to act on flimsy evidence provided by anonymous sources, and is used by the king as a political weapon to control and intimidate his opponents.
"The news of lifting the state of emergency after three months of its enforcement is a welcome step but the continuity of the RCCC is absurd as it is merely to terrify or frighten politicians or businessmen," a senior leader of the Nepali Congress (Democratic) Gopal Man Shrestha, said.
"The continuation of the RCCC is unconstitutional and shows the king is trying to impose direct rule"
Sri Hari Aryal,
"After the lifting of the state of emergency in the country, the RCCC is king Gyanendra's political weapon to terrify the political opposition and general public," he said.
Both domestic and overseas critics have said the king's power grab is unconstitutional.
"The continuation of the RCCC is unconstitutional and shows that the king is trying to impose direct rule," constitutional expert Sri Hari Aryal said.