(Updates with foreign greetings, U.S. comments)

By Gopal Sharma

KATHMANDU, Aug 15 (Reuters) - Lawmakers elected a Maoist who led a decade-long insurgency against the Hindu monarchy as Nepal's new prime minister on Friday, marking the Himalayan nation's change into a democratic republic.

Pushpa Kamal Dahal, who still uses his guerrilla nom de guerre Prachanda, won 464 votes out of 577 ballots cast in a special Constituent Assembly vote after weeks of political battles.

Lawmakers hugged a beaming Prachanda, who said: "I am very excited at this moment".

Outside the assembly, hundreds of Maoist supporters danced, many waving hammer-and-sickle flags.

"Long live the Maoists, long live Prachanda," they shouted as their bespectacled leader, wearing a black suit and blue shirt, emerged from the assembly.

They put garlands of flowers around his neck and daubed his forehead with vermilion as he smiled and waved to the crowd.

The election opens the way for the formation of a new government, a key step towards capping a peace process that ended a civil war in which more than 13,000 people died since 1996.

Prachanda defeated Sher Bahadur Deuba, a three-time former prime minister from a centrist party.

His colleague, Baburam Bhattarai, seen as number two in the Maoist hierarchy, said Maoist politicians including Prachanda will no longer hold any posts in the rebel army and will return property seized by them during the war.

"Today is a day of pride and it will be written with golden letters in the history of the nation," Bhattarai said.

SURPRISE WIN

The Maoists scored a surprise win in a special assembly election in April but did not get a parliamentary majority, prompting a tussle for power that left Nepal struggling to form a new government four months after the polls.

The assembly abolished the 239-year-old monarchy and declared the mountain nation a republic in May.

Prachanda, 53, led an insurgency against the monarchy in the jungles around the Himalayan foothills.

But once he came out of the jungle, Prachanda transformed himself from a revolutionary insurgent into a wily politician, insisting that Maoists are not "dogmatic communists" and that globalisation and free markets were facts of life.

The Nepali Congress, the second biggest party in the assembly which has ruled Nepal for most of the past 18 years, have refused to join the Maoists in government.

"The peace process has not concluded yet, the country must be free from violence and fear," senior Nepali Congress leader Ramchandra Poudel said.

Prachanda has promised land reform in one of the world's poorest countries, where 80 percent of the 26.4 million people depend on farming for a living.

The Maoist former guerrillas are still on the U.S. list of terrorist organisations although U.S. officials have met Prachanda.

The United States, influential southern neighbour India and a key donor Japan were among the first to greet the election of the new Nepali leader.

"We hope that election of the Prime Minister removes the last barrier to speedy formation of a government, constructive action on key issues facing Nepal, and a start on the difficult but necessary task of drafting Nepal's new constitution," a U.S. embassy statement said.

The assembly is meant to prepare a new constitution within two years and map Nepal's political future.

Prachanda, a former agricultural science teacher, is seen as a strong leader by his colleagues, who say he has infused loyalty and discipline among his followers.

The Maoists control 227 seats in the assembly that currently has 595 members. (Writing by Bappa Majumdar; Editing by Paul Tait and Angus MacSwan)

AlertNet news is provided by