By Gopal Sharma

KATHMANDU, Aug 22 (Reuters) - Nepal's Maoist Prime Minister Prachanda picked a coalition cabinet on Friday and named ex-guerrilla commander Ram Bahadur Thapa as defence minister in charge of the army that once battled the rebels.

Thapa is seen as a hardliner among the Maoists and was the commander of the once feared guerrillas who waged a brutal war against the monarchy in the rugged Himalayan foothills from 1996. More than 13,000 people were killed in the decade-long war.

The Maoists have confined 19,000 fighters to U.N.-supervised camps and the ex-rebels must be rehabilitated by the government. A ministerial panel is to decide their fate, seen as key to lasting peace.

A presidential palace statement said Prachanda also named his deputy Baburam Bhattarai, a Maoist ideologue, as finance minister responsible for economic development in one of the world's poorest countries.

He picked Upendra Yadav, chief of the Madheshi People's Rights Forum, a key ally, as foreign minister, a move seen to appease the Madheshi community dominating the country's troubled southern plains bordering India.

At least 50 people were killed in protests demanding autonomy in the Madheshi region since the Maoists announced a ceasefire in 2006.

But another potential coalition partner the Communist UML party said six of its members, scheduled to be sworn in on Friday, would not join the government until a row with the Maoists over cabinet posts was resolved. The Maoists said four other smaller parties would join the coalition in future.

The Maoists emerged as the single biggest party in a constituent assembly elections in April.

They must now try to bridge ethnic and social divides, address the grievances of war victims' families and quickly tackle chronic fuel and food shortages, diplomats said.

The assembly, meant to write a new constitution and double as an interim parliament, elected Prachanda, 53, with an overwhelming majority last week, ending months of political deadlock after April's election left the Himalayan nation with a split parliament.

"It is quite clear that the peace process has to be taken to a logical conclusion and it will be my priority to prepare a new constitution," Prachanda said earlier this week.

The new constitution is expected to be written in two years and will be a final step in a peace process that has already seen Nepal, tucked between Asian giants China and India, abolish the 239-year-old monarchy and become a republic.

Some analysts were cautious about the Maoists' commitment to democracy but there was a general sense of euphoria.

"Let's all help this government to last, ensure stability and kick-start the economy," the weekly Nepali Times said. (Editing by Krittivas Mukherjee and David Fogarty) (For the latest Reuters news on Nepal see: http://in.reuters.com, for blogs see http://blogs.reuters.com/in)

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