KATHMANDU, Feb. 16 (Reuters) - Nepal must not lose sight of economic development even during its challenging transition to peace after years of conflict that has killed thousands, the World Bank said on Friday.

The Himalayan country needs to attract more investment and boost infrastructure, it said, adding that the country had huge potential as it was wedged between India and China, two among the world's fastest growing economies.

"Tremendous progress has been made by the country to arrive at the point where it is today," Graeme Wheeler, managing director of the World Bank, told reporters at the end of a two-day visit to Nepal.

"Nepal now faces a historic moment of great opportunity and hope," he said.

Nepal's economy, dependent on aid and tourism, was badly hit by a Maoist conflict that began in 1996 as many industries and development projects either closed or slowed down due to the fighting.

More than 13,000 people died, tens of thousands were maimed and at least 200,000 displaced before the government and the Maoists signed a peace deal that has seen the former guerrillas join an interim parliament.

The deal also envisages the Maoists joining an interim administration to oversee elections for a constituent assembly tasked to map out the country's political future including that of the monarchy, which the Maoists want abolished.

"Nepal should not lose sight of the critical development agenda during this transition," Wheeler said, adding that Nepal had implemented some important reforms and protected past economic and social gains.

The government says the economy that grew by less than 2 percent in 2005/06 was expected to grow by three percent this year.

"The World Bank believes that it is important to continue with a broad-ranging development agenda to help ensure a sustainable peace in which all Nepali citizens benefit," Wheeler said after talks with the government as well as the Maoists.

Nepal receives more than 60 percent of the cost of its economic development from foreign donors including the World Bank, which provides up to $200 million annually.

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