The communist group's announcement came as Nepal's political leaders said on Tuesday that they were ending 19 days of pro-democracy demonstrations and a general strike against the king's direct rule.
A massive protest planned for Tuesday will instead go ahead as a "victory rally" said Prasad Situala, a spokesman for the Nepali Congress, a member of the seven-party alliance.
The seven parties, speaking as thousands of people cheered and danced on the streets, named Girija Prasad Koirala, a former prime minister, as the new head of government.
Situala said the prime minister's first job would be to bring Maoist insurgents - whose campaign against the government has left 13,000 dead - into the political mainstream.
"Now we have to create an environment for an interim government that will have Maoist participation," said Minendra Rijal, an alliance leader.
Situala said the work on an assembly to write a new constitution would begin immediately - a key demand of the rebels.
However, the Maoists' leader – known as Prachanda – said the parties had committed "another historic mistake."
"The proclamation is a sham and a conspiracy against the Nepali people"
"The proclamation is a sham and a conspiracy against the Nepali people," Prachanda said in a statement in the Nepali language. "Our party firmly rejects this."
The Maoist leader also called for a blockade of Kathmandu and other Nepali towns.
Overnight protesters had cheered, danced and hugged each other on the streets of the capital, Kathmandu and other towns.
"This victory is the people's victory, long live democracy," many chanted.
In Kathmandu, celebrations
continued through the night
"The ball is now in the court of the seven political parties," Kumar Thapa, a 25-year-old milk vendor told the Associated Press.
In the capital itself, life slowly began to return to normal after days of curfew, protests and closures.
Many buses and taxis ran for the first time since April 6, and mobile phone connections, cut at the height of the protests on Saturday, were restored.
State of emergency
Nepal's parliament has been dissolved since 2002, and a multi-party government was suspended in February last year when King Gyanendra declared a state of emergency and assumed absolute power himself.
In an announcement on national television late on Monday, the king said he was calling back the assembly.
Gyanendra had offered last week to hand over power to a prime minister nominated by the seven parties, but they said this was not enough.
Monday's address went much further in content and in tone and left many protesters surprised at the scale of the king's climb-down.
Arjun Narsingh K.C., a senior leader of Nepali Congress, the country's largest party, said the king's announcement represented "the victory of the people's movement."
The United States welcomed the move but said Washington was looking for more concessions from the king.
"We believe that he should now hand power over to the parties and assume a ceremonial role in his country's governance," said Adam Ereli, spokesman for the State Department.
Since beginning their campaign almost 10 years ago, the Maoists have taken effective control of large swathes of the countryside in a rebellion that has left at least 13,000 people dead.