"We, through this proclamation, reinstate the house of representatives which was dissolved on May 22, 2002," he said on national television on Monday.
"We declare the reinstatement of the House of Representatives," he added.
The announcement comes a day before the opposition parties were to stage a huge rally in the capital Kathmandu demanding a return to multi-party democracy.
Senior members of the country’s seven-party political alliance have welcomed Gyanendra's move and said they were likely to postpone protests that have engulfed the nation.
Arjun Narsingh KC, a senior leader of the Nepali Congress, the country's largest political party, said: "It is the victory of the people's movement."
He said the alliance would respond formally to the king's proclamation on Tuesday but was likely to postpone a major rally planned for the capital on that day.
"It is the victory of the people's movement"
Arjun Narsingh KC,
Senior leader of the Nepali Congress
The parties have been agitating since April 6 to force Gyanendra to restore multi-party democracy.
At least 12 people have been killed and thousands wounded in 19 days of protests since then.
Effective on Friday
The move to restore parliament, a key demand of opposition parties leading the protests, would be effective from Friday, the king said.
"The session of the House of Representatives will take place on April 28," a nervous looking Gyanendra said during his five-minute address.
Nineteen days of protest have
brought the nation to a standstill
"We call upon the seven-party (opposition) alliance to bear the responsibility of taking the nation on the path of national unity and prosperity while ensuring permanent peace and safe-guarding multi-party democracy."
Gyanendra took absolute power after sacking the government in February 2005, saying it was corrupt and had failed to tackle a bloody 10-year Maoist insurgency.
The parliament was dissolved in May 2002 as it appeared set to refuse to extend a six-month state of emergency that gave the king sweeping powers to tackle the Maoist insurgency.
Maoists started their campaign in 1996 and have taken effective control of swathes of the countryside in a campaign that has left more than 12,500 people dead.
The king appeared on television last Friday promising executive power to the people and asked the seven-party opposition alliance to recommend a prime minister.
The international community gave a qualified welcome to the move but it was snubbed by the opposition, which said it did not go far enough to restrict his wide-ranging powers.