The proclamation aims to strip the king of his formal title of supreme commander-in-chief of the military, and calls for an end to "His Majesty's" administration, renaming it simply the Nepal government.
"It reflects the aspirations of the people and respects the sacrifices of the people who were martyred during the movement," Girija Prasad Koirala said on Thursday, referring to the motion was passed unanimously.
Cutting the monarch's powers was a key demand of last month's pro-democracy protests, which led to King Gyanendra reinstating parliament and handing power back to a multi-party government.
The resolution was presented after it was approved by the multi-party cabinet earlier on Thursday.
Taxing the king
It also plans to tax the king and allow his actions to be challenged in court. The principal advisory body of the king, the Raj Parishad or privy council, is also expected to be scrapped.
Analysts have expressed doubts over the effectiveness of the proclamation, as under the current constitution no parliamentary bill can become law until the head of state - the king - signs it.
Prime Minister Koirala presented
the resolution on Thursday
But politicians say the proclamation overrides the constitution and reflects the will of the people and therefore cannot be challenged.
They also say the king would have no powers and the proclamation would not need his approval.
King Gyanendra triggered the crisis when he sacked the government and assumed full powers on February 1 last year, saying the government had failed to quell an anti-monarchy Maoist revolt that has killed more than 13,000 people.
The new government has reciprocated a rebel truce, and the Maoists have agreed to talks.