Beginning the talks in Kathmandu on Monday Girija Prasad Koirala also called on the leaders of Nepal's Maoist rebels to renounce violence and attend peace talks.
The process of forming a new government follows the decision last week by King Gyanendra to bow to weeks of protests and relinquish direct rule, handing power back to Nepal's politicians.
Koirala was expected to name representatives from the country's seven main political parties as ministers later in the day.
The new government will have to spell out the dates and other details of the constitutional assembly that will rewrite the constitution - a demand of Maoist rebels, who also played a big part in the recent anti-monarchy protests.
The newly reinstated parliament has called unanimously for an assembly to rewrite the constitution, and for a ceasefire with the Maoists.
Koirala briefly addressed parliament on Sunday, calling on the communist rebels to come out of the political cold.
Nepal's Maoist rebellion has left
"I urge the Maoists today to give up violence and come forward for peace talks," said the ailing 84-year-old Koirala, who was greeted by legislators with a standing ovation.
Other legislators backed Koirala's call to reach out to the Maoists.
"It is time that everyone should give up violence and all forms of terror," Madhav Kumar Nepal, general secretary of the Communist Party of Nepal, said in parliament.
Three weeks of demonstrations, which included clashes with security forces that left 16 protesters dead, ended early last week when King Gyanendra announced he would reinstate parliament.