An official said the incident took place on Wednesday at Parasi, 200km southwest of the capital Katmandu.
Hundreds of protesters had come onto the streets in the town near the border with India, when police clashed with them using batons. The protesters also pelted stones at the police.
Police opened fire, hitting six of the protesters, said the official who did not give his name because he is not authorised to speak to reporters. One was killed while five more were wounded and are being treated for bullet injuries.
Bishnu Prasad Pandey is the fourth person to be killed by security forces opening fire at protesters during a week of protests and a general strike by the alliance of opposition parties against King Gyanendra's direct rule over this Himalayan nation.
Security forces meanwhile lifted a daytime curfew imposed on the capital but arrested more demonstrators, including 25 journalists, as protests continue against the king's absolute rule.
The journalists were arrested along with five human rights activists who staged pro-democracy protests in an area where demonstrations were banned.
Meanwhile opposition parties said they plan to hold a rally later on Wednesday to mark the death of three protesters shot dead by troops at the weekend.
Kashinath Adhikari, a protest leader from the Communist Party of Nepal, said: "The seven-party alliance is holding a gathering to pay tribute to those martyrs who were killed in demonstrations".
Protesters planned to march from several points and converge in the centre of Kathmandu for a mass protest rally, said Subash Nemwang of the Communist Party of Nepal, a member of a seven-party alliance that is demanding that the king should restore democracy.
"The seven-party alliance is holding a gathering to pay tribute to those martyrs who were killed in demonstrations"
Kashinath Adhikari, a protest leader from the Communist Party of Nepal
Further demonstrations were also expected in Gongabu, on the outskirts of the capital, where thousands of demonstrators clashed with police on Tuesday and five protesters were treated for shotgun wounds.
Call for talks
Meanwhile, the royal government has reiterated a willingness to talk with political parties leading the protests to restore democracy after King Gyanendra seized absolute power 14 months ago.
Shrish Shumsher Rana, the government spokesman, was quoted as saying in the state-run Rising Nepal newspaper that the king "has from the very outset emphasised on talks to resolve the problem".
There was no reaction from opposition parties, but analysts said the monarch was becoming increasingly isolated by the protests and strike action, coupled with increasingly strident international criticism.
Police arrested 25 journalists and
five activists on Wednesday
Nearly 1,500 people, including prominent lawyers, politicians, activists and civilians, have been arrested in the past nine days since the opposition parties launched the latest round of protests.
An unknown number have since been released.
King Gyanendra, who has earned international condemnation for the escalating crackdown, has justified his power grab by saying the politicians had failed to quell the decade-old Maoist insurgency, which has left 12,500 people dead.