The protests continued on Tuesday hours after a partial relaxation of curbs imposed to quash demonstrations against King Gyanendra, who seized power early last year.
Political activists and students waved party flags and chanted slogans demanding that the king surrender his grip on power and restore democracy in the impoverished Himalayan nation.
"Down with the autocratic monarchy," they chanted. "Long live democracy."
At least three people were injured in scuffles with police and 19, including a former minister, were detained, activists said.
Chyan Devi Parajuli, 82, said: "We will not rest until we get democracy restored."
On Tuesday, the government lifted a night curfew and allowed rallies in outlying parts of the capital.
It also released key party leaders from house arrest at the weekend, and invited them for talks - an offer they swiftly rejected.
King Gyanendra seized power
in the Himalayan nation last year
But the ban on rallies in the heart of Kathmandu remained.
Kamal Thapa, the interior minister, said "we have the feeling the security situation has improved".
He said that the restrictions would be reimposed if there were fresh trouble.
The curbs were imposed to thwart a pro-democracy rally planned for last Friday and which had been called by an alliance of seven mainstream political parties to protest against Gyanendra's seizure of power last year.
Thousands of heavily armed police took to the streets to prevent the rally, placing political leaders under house arrest.
The political parties have called a general strike for Thursday, when candidates for municipal elections are expected to start filing their nomination papers for polls on 8 February.
The mainstream parties are boycotting the polls, which were set by the king without consulting their leaders. Maoist rebels have vowed to stop the elections.
Girija Prasad Koirala: The polls
have no political or legal basis
Girija Prasad Koirala, the former prime minister, said in a statement: "The elections have no social, political or legal basis.
"I urge the international community, including the United Nations, not to give any recognition to the polls."
Analysts said the king was fighting a losing battle.
Rajendra Dahal, editor of the Himal magazine, said: "He should hand power back to political parties. Sooner he does that the better it is for the institution of monarchy."
India and the US have called on the king to reach out to political parties and restore democracy, a call he has ignored so far.
Gyanendra says he took power to crush an anti-monarchy Maoist insurgency in which more than 12,500 people have died since 1996.
"We hope all forces in Nepal can narrow their differences through dialogue and work together for the country's development and prosperity"
Chinese Foreign Mministry spokesman
But so far he has failed to do so and appears more isolated than ever.
China, Nepal's northern neighbour, also urged reconciliation.
Kong Quan, a Foreign Ministry spokesman, said: "China is very concerned about recent political changes in Nepal.
"We hope all forces in Nepal can narrow their differences through dialogue and work together for the country's development and prosperity."