An international aid worker estimated that more than 20,000 people turned out in the western town of Nepalgunj, although a local reporter said the crowd was far bigger.
Janak Pandey, a journalist, said: "Thousands of people shouting anti-monarchy slogans took to the streets, bringing the town to a standstill."
Police fired teargas and blank rounds, but were outnumbered and fled, he said.
The crowd attacked a construction site named after King Gyanendra in the town, 500km from Kathmandu.
"This is the biggest demonstration I have ever seen in Nepalgunj," Pandey said.
In the capital, 25 government employees were arrested for demonstrating, police said.
"Twenty-five workers from the home ministry were rounded up for protesting against the government," said a police officer on condition of anonymity.
Gopendra Pandey, the home ministry spokesman, confirmed the arrests but said he did not know to which ministry they belonged.
Nepal has been crippled by a general strike organised by opposition parties in concert with Maoist rebels, demanding that Gyanendra restore multi-party democracy.
Leaders of the seven-party alliance said a massive demonstration planned for Thursday in the capital would go ahead despite a ban on protests.
Yogesh Bhattarai, a Communist Party of Nepal (Unified Marxist-Leninist) protest leader, said: "We're planning to bring over 500,000 people onto the streets."
Protest leaders promise 500,000
will be on the streets on Thursday
Hardships caused by the strike eased on Tuesday as more shops opened in the capital on the 13th day of the anti-royal campaign.
Pouring rain reduced the number of activists on the streets and more vehicles were out.
A demonstrator was killed on Monday and half a dozen were injured in southern Nepal, the fifth death of a protester in a series of nationwide rallies.
Diplomats urged the king to end the stand-off to avoid further upheaval.
"Our message is you don't have a lot of time, you have to move and you have to talk to the parties," a senior western diplomat said.
"The situation is getting more and more precarious. The king has to engage the parties in open, honest dialogue, leading to the restoration of democracy," the diplomat said.
King Gyanendra has met two
former prime ministers
Gyanendra held talks with two former prime ministers late on Monday.
Krishna Prasad Bhattarai, a royalist who was prime minister from 1999 to 2000, said "there will be a change" in the political situation, but added: "How can a person with all powers easily decide to give up power?"
Surya Bahadur Thapa, who has served several times as prime minister since the 1960s, also met the king, but told party colleagues: "There was no positive sign."
Kathmandu residents are facing petrol shortages and high prices even though the army was brought in to keep the Kathmandu valley supplied with food.
On Sunday, opposition parties, removed when Gyanendra assumed direct control in February 2005, declared economic war on the king.
They urged citizens to stop paying taxes and utility bills, and asked overseas Nepalese to stop sending funds from abroad.
"The situation is getting more and more precarious. The king has to engage the parties in open, honest dialogue, leading to the restoration of democracy"
India said it was sending a senior official to Nepal on Wednesday for talks.
Karan Singh, head of the foreign ministry's Indian Council of Cultural Relations, will visit Nepal as a special envoy of the prime minister, a foreign ministry statement said.
India, critical of Gyanendra's power grab after he dismissed the civilian government, has urged him to hold talks with political parties.
Gyanendra said he had to assume full power because politicians had failed to quell the Maoist insurgency, which has left about 12,500 people dead in a decade.