KATHMANDU (Reuters) -- Nepal's multi-party government and Maoist rebels resumed talks on Tuesday, with the question of disarming the leftist insurgents the main stumbling block to a lasting peace.

The dialogue, led by Prime Minister Girija Prasad Koirala and Maoist chief Prachanda, is the second attempt in three days to negotiate the rebels' entry into an interim administration.

The two sides held long-delayed talks on Sunday after serious differences over arms and the future of the monarchy had dogged the peace process.

"The arms management has become the main issue for the government," defense analyst Bishnu Raj Upreti told Reuters. "They have to find a solution, but it is not easy. Therefore, the meeting may continue for a few days more."

The peace process began in May after King Gyanendra surrendered power following weeks of often bloody street protests.

The government has conceded to a key Maoist demand to hold elections for an assembly to map the country's future and decide the future of the monarchy. It has also promised to bring the rebels into an interim administration.

Both sides have agreed to confine their armies to camps or barracks under UN supervision during the constituent assembly elections, which they say will be held by June 2007.

But some members of the ruling coalition say the rebels should disarm before joining the interim Cabinet that will supervise the planned elections.

The Maoists, who see the constituent assembly elections as a tool to abolish the monarchy, say they would rather stay out of the administration than lay down their weapons.

The rebels, wary of joining any government which pays lip service to the king, have also called for the monarchy to be suspended or abolished immediately.

"If there is a solution to the question of arms management, agreements on other issues including the monarchy will not be a problem," said Ram Chandra Poudel, a top leader of the Nepali Congress party, the largest group in the ruling alliance.

But Maoist negotiator Krishna Bahadur Mahara said Poudel's party was unprepared for sweeping changes.

"Everything about Tuesday's meeting depends on how the Congress presents itself at the talks," he said.

"The Congress does not appear ready to snap ties with the king and army which was the spirit of the popular movement," Mahara said, referring to April's street protests.

More than 13,000 people have died since the conflict began in 1996. Previous talks with rebels foundered in 2001 and 2003 over the question of the monarchy.

As the meeting began, hundreds of people carrying placards demonstrated outside the venue to press for the successful conclusion of the peace process.

"Set up an interim government immediately," they shouted. "Declare the date for constituent assembly elections," another slogan said.

It was not clear who had organized the protests but in the past the Maoists have used carefully orchestrated demonstrations to press their demands.